GIFT   OF 


INCOME  TAX  LAW  AND  ACCOUNTING 


THE  MACMILLAN  COMPANY 

NEW  YORK  •   BOSTON   •   CHICAGO    •  DALLAS 
ATLANTA   •   SAN  FRANCISCO 

MACMILLAN  &  CO.,  LIMITED 

LONDON    •  BOMBAY   •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  LTD. 

TORONTO 


INCOME  TAX 

LAW  AND  ACCOUNTING 
1918 


BEING 

A  PRACTICAL  APPLICATION  OF  THE  PROVISIONS  OF  THE  FEDERAL 

INCOME  TAX  ACT  OF  SEPTEMBER  8,    1916,  AS  AMENDED; 

THE    WAR  INCOME   TAX   AND  THE   WAR   EXCESS 

PROFITS  TAX  LAWS  OF  OCTOBER  3,  191?;  AND 

CONTAINING 

THE  CORPORATION  CAPITAL  STOCK  TAX  LAW  AND  RULINGS  THERE- 
ON; FEDERAL  ESTATE  TAX,  EXCISE  AND  MISCELLANEOUS 
WAR  TAXES;  AND  THE  NEW  YORK  STATE  INCOME 
TAX  STATUTE  APPLICABLE  TO  MANUFACTUR- 
ING AND  MERCANTILE  CORPORATIONS 


BY 
GODFREY  N.  NELSON  ^  j 


MEMBER  OF  THE  NEW  YORK  BAR 
CERTIFIED  PUBLIC  ACCOUNTANT,   STATE  OF  NEW  YORK 


SECOND   EDITION 


fork 

THE  MACMILLAN  COMPANY 
1918 

All  rights  reserved 


COPYRIGHT,  1917 
BY  GODFREY  N.  NELSON 

COPYRIGHT,  1918 

BY  THE  MACMILLAN  COMPANY 
Set  up  and  electrotyped.    Published  January,  1918 


i jr  <K  cui^vs 


PREFACE  TO  SECOND  EDITION 

The  numerous  commendatory  reports  upon  the  first  edition 
of  this  book  and  the  requests,  by  those  who  used  it,  for  one 
covering  the  new  laws,  have  impelled  the  author  to  write  the 
present  revised  and  enlarged  edition.  By  reason  of  the  ma- 
terial amendments  of  the  Income  Tax  Act  of  September  8,  1916, 
and  the  enactment  of  the  War  Income  and  the  War  Excess 
Profits  Taxes,  contained  in  the  War  Revenue  Bill  of  October  3, 
1917,  all  of  which  are  treated  herein,  have  necessitated  the  re- 
writing of  the  greater  part  of  the  book  so  that  the  present  edi- 
tion is,  practically,  an  entirely  new  work.  The  original  scheme 
of  arrangement,  however,  has  been  largely  adhered  to  with  the 
view  of  making  the  book  a  practical  guide  to  those  required  to 
prepared  returns  either  for  themselves  or  others. 

All  Treasury  Decisions  issued  to  date,  bearing  upon  the 
Excess  Profits  Tax  Law,  have  been  incorporated  herein  either 
in  the  text  or  in  foot-notes.  From  time  to  time  additional  deci- 
sions and  regulations  will  be  issued  by  the  Treasury  Depart- 
ment "as  occasion  demands,"  copies  of  which  may  be  obtained 
upon  application  to  the  local  collectors  or  to  the  Commissioner 
of  Internal  Revenue  at  Washington.  Many  problems  arising 
under  the  Excess  Profits  Tax  Law  will  not  be  ruled  upon  by  the 
Department  until  applications  for  rulings  are  formally  pre- 
sented. In  the  absence  of  specific  rulings  the  writer  has  sug- 
gested interpretations  of  the  law,  particularly  with  respect  to 
methods  of  computing  invested  capital.  In  such  matters  as 
the  writer  has  ventured  his  construction  of  the  law  the  sugges- 
tions contained  herein  should  be  used  in  conjunction  with  the 
decisions  and  regulations  that  will  be  promulgated  by  the  De- 
partment. The  Department  should  be  consulted  freely  and 
unhesitatingly  and  questions  of  importance  should  be  sub- 
mitted for  special  rulings.  Such  questions  form  the  basis  of 
decisions  and  rulings  and  the  solution  of  your  problems  may 
help  many  others  who  encounter  the  same  difficulties. 

Time  has  not  permitted  the  rewriting  of  some  paragraphs 

38C2S3 


VI  PREFACE 

affected  by  very  recent  decisions  but  notes  have  been  appended 
in  connection  therewith  in  order  to  apprise  the  reader  of  the 
latest  rulings,  and  the  text  of  such  decisions  have  been  added 
to  Chapter  V  on  the  Excess  Profits  Tax. 

Professional  contact  with  the  officials  and  officers  of  Internal 
Revenue  of  the  Treasury  Department  at  Washington,  including 
the  Commissioner,  himself,  and  with  such  members  of  the  Ad- 
visory Board  as  the  writer  has  had  the  pleasure  of  meeting,  has 
impressed  him  with  their  profound  and  unanimous  desire  to 
grant  to  the  taxpayer  every  right  and  fair  concession  possible 
to  be  drawn  from  a  most  liberal  interpretation  of  the  law  that 
will  ensure  an  equitable  administration  of  it.  With  this  sig- 
nificant assurance,  not  inconsistent  with  a  positive  duty,  the  tax- 
payer should  dismiss  from  his  mind  that  sense  of  antagonism 
that  so  often  exists  toward  tax  departments  of  the  Government, 
and  should  seek  to  cooperate  with  them  for  the  procurement  of 
the  necessary  revenue  of  which  the  present  extraordinary  taxes 
are  expected  to  contribute  a  vital  part. 

The  writer  wishes  to  express  his  gratitude  to  those  of  his 
friends  who  by  suggestions  and  helpful  recommendations  and 
counsel  have  made  possible  the  treatment  of  a  variety  of  prob- 
lems that  will  present  themselves  under  the  new  laws;  he  also 
takes  occasion  to  express  his  grateful  acknowledgment  of  the 
helpfulness  of  the  Income  and  War  Tax  Services  of  the  Cor- 
poration Trust  Company,  which  contain  the  rulings  and  deci- 
sions of  the  Treasury  Department  upon  these  laws. 

On  account  of  the  difficulty  of  arrangement,  the  subjects  are 
not  coordinately  grouped.  The  index,  however,  has  been  made 
especially  copious  in  order  to  afford  a  ready  reference  to  the 
subject  of  inquiry. 

GODFREY  N.  NELSON. 

52  Broadway,  New  York  City, 
January  2,  1918. 


PREFACE  TO  FIRST  EDITION 

Since  the  enactment  of  the  Corporation  Excise  Tax  of  1909, 
and  the  Federal  Income  Tax  Law,  applicable  to  both  individuals 
and  corporations,  effective  March  i,  1913,  the  writer  has  pre- 
pared, and  advised  with  regard  to,  many  income  tax  returns  of 
corporations  and  individuals.  The  preparation  of  returns  al- 
most invariably  necessitated  the  analysis  and  subdivision  of 
book  accounts  as  commonly  kept  in  order  to  conform  them  to 
the  classification  prescribed  by  these  laws.  To  obviate  the 
necessity  of  analyzing  and  rearranging  accounts  and  to  facili- 
tate the  preparation  of  returns  was  the  first  thought  that  ac- 
tuated the  writing  of  this  book.  To  make  it  more  helpful  there 
have  been  included  rulings  of  the  Treasury  Department  and 
court  decisions  on  the  most  important  items  of  income  and 
expenses. 

The  writer  makes  no  pretense  at  having  produced  a  law  book 
and  at  no  time  had  that  aim  in  view.  This  is  intended  merely 
to  serve  the  purpose  of  a  practical  guide  to  those  who,  either 
for  themselves  or  others,  are  called  upon  to  prepare  returns. 
Statements  contained  herein  are  predicated:  first,  upon  the 
Income  Tax  Law  enacted  September  8,  1916,  which  was  retro- 
active and  took  effect  as  of  January  i,  1916;  second,  upon  rul- 
ings by  the  Treasury  Department  thereon;  and  third,  upon 
such  rulings  and  court  decisions  under  the  Excise  Tax  of  1909 
and  the  Income  Tax  Law  of  1913,  which  are  consistent  and  not 
in  conflict  with  the  requirements  of  the  present  law. 

An  expression  of  gratitude  is  due  to  various  officials  and 
officers  of  Internal  Revenue  of  the  Treasury  Department  at 
Washington  and  New  York  for  the  courtesies  shown  to  the 
writer  in  matters  submitted  to  them,  but  this  acknowledgment 
should  not  be  construed  as  an  endorsement  by  them  of  the 
contents  of  this  book.  The  writer  also  acknowledges  the  help- 
fulness of  the  Income  Tax  Service  of  the  Corporation  Trust 
Company,  the  index  to  which  was  especially  useful  as  a  ready 


VU1  PREFACE 

reference  to  Treasury  Decisions.  Mention  should  also  be  made 
of  Mr.  Henry  Campbell  Black's  treatise  on  the  law  of  "Income 
Taxation"  under  Federal  and  State  laws,  to  which  the  writer 
has  referred. 

The  arrangement  of  subjects  is  not  co-ordinate  throughout, 
but  the  order  of  the  statute  and  the  returns  of  net  income  have 
been  followed  as  nearly  as  practicable. 

GODFREY  N.  NELSON. 

52  Broadway,  New  York  City, 
December  i6th,  1916. 


TABLE  OF  CONTENTS 

I.  INCOME  TAX  AS  APPLIED  TO  INDIVIDUALS 

PAGE 
I.  General  Provisions  of  Law:  Income  Tax — War  Income  Tax — 

War  Excess  Profits  Tax— When  Effective i 

II.  Income  Tax  (Act  of  Sept.  8,  1916):  Who  is  subject  to  Income 
Tax — Division  of  Tax — Normal — Additional — Dividends — 
Exemptions 2 

HI.  War  Income  Tax  (Act  of  Oct.  3,  1917):  Who  is  subject  to  War 
Income  Tax — Division  of  Tax — Normal — Additional — Div- 
idends— Exemptions 3 

IV.  Income  and  War  Income  Taxes:  Exemptions — Combined  Nor- 
mal Taxes — Combined  Additional  Taxes — Examples  of 
Computing  Normal  Taxes — Examples  of  Computing  Normal 
and  Additional  Taxes— Table  of  Normal  and  Additional 
Taxes  on  Incomes  of  $2,000  to  $3,000,000 4~n 

V.  Returns  of  Individuals:  Combined  Return — Who  is  Required  to 
make  return — Return  Form — Return  by  Husband  and  Wife — 
Fiduciaries — Agent — Private  Banks — Citizen  residing  abroad 
— To  whom  Return  is  made — Verification — Returns  by  persons 
in  Military  Service — Due  date  of  filing — Extension  of  Time — 
Penalty  for  Failure  to  file  Return— False  Return— When  In- 
ternal Revenue  Officer  may  prepare  Return — Due  date  of 
Payment — Penalty,  delayed  Payment — *Claims  for  Refund 
of  Taxes — Advance  Instalment  Payments — Forms  of  Pay- 
ment— Porto  Rico,  Philippines 11-19 

VI.  Income  of  Individuals:  Income  Defined — Undivided  Surplus  of 
Corporations — Dividends,  Life  Insurance  Policies — Principal, 
Life  Insurance  Policies — Accident  Insurance — Damages,  In- 
juries— Dividends — Dividends  earned  prior  to  March  i,  1913 — 
Stock  Dividends — Payable  in  Securities — Paid  out  of  Reserves 
— Purchases  and  Sales  of  Stock — Exchange  of  Stock — Stock 
received  in  Reorganization — Sale  of  Stock  Rights — Scrip 
Dividends — Dividends  Received  from  Foreign  Corporations — 
Return  of  Capital,  not  Income — Profits  of  Limited  Partner- 
ships— Salaries,  when  Returnable — Salary  paid  by  Stock — 
Salary  received  of  Exempt  Corporation — Living  Quarters, 


X  TABLE   OF   CONTENTS 

PAGE 

part  of  Compensation — Board,  Lodging,  etc.,  in  lieu  of  Cash — 
Bonuses — Salesmen's  Commissions — Professional  Fees,  when 
Returnable — Clergymen — Compensation  of  Trustees — Profit 
on  Sales  of  Capital  Assets — Profit  or  Loss  on  Securities  ac- 
quired prior  to  March  i,  1913 — Profit  Defined — Sales  of  Real 
Estate — Cost  of  Property — Appreciation  not  Income — 
Promissory  Notes — Gifts,  Legacies — Income  of  Estates — 
Heirs  and  Legatees — Legacies,  Vested  Interest — Profit  re- 
turnable by  Legatee — Trust  Estate  undistributed  for  Period  of 
Years — Insurance  Agents — Rentals  Received — Interest,  Gov- 
ernment Obligations  —  Political  Subdivision  —  Contractor 
Working  for  State — Liberty  Bonds,  3^% — 4% — Income  and 
Expenses  of  Government  Employees — Rates  of  Exchange — 
Foreign  Investments — Interest,  Bank  Account — Pensions — 
Alimony — License  required  by  Collectors  of  Foreign  Income — 
Foreign  Income,  Non-Resident  Aliens — Record  Owner  not 

Actual  Owner  of  Stock 19-48 

VII.  Farms  and  Farmers:  "Farms  and  Farmers,"  Defined — Income 
from  Farms — Prepaid  Farm  Expenses — Shares — Expenses — 
Losses  —  Live  Stock  —  Farm  Machinery  —  Depreciation  — 

Books  of  Account — Farm  maintained  only  for  Recreation 48-50 

VIII.  Deductions  Allowed  Individuals:  Exemptions — Single — Married 
— Heads  of  Families — Salaries  Exempt — Dividends  Creditable 
— Tax  Withheld — Necessary  Business  Expenses — Interest 
Deductible — Interest  Incurred  in  Purchase  of  Liberty  Bonds — 
Accrued  Interest  on  Bonds  Purchased — Charities — Taxes — 
Local  Assessments  —  Water  Rates  —  Pensions — Premium, 
Fidelity  Bonds — Loss  Defined — Loss  not  in  Business  or  Trade 
— Losses,  more  than  one  Trade — In  Trade  Defined — Bad 
Debts — Depreciation — Stocks  and  Bonds — Depletion,  Oil  and 
Gas  Wells — Mines — Improvements — Restoring  Property — 
Replaced  Buildings — Condemned  Buildings — Damage  Suits, 
Judgments — Insurance  Reserve  Funds — Insurance  Premiums 
— Commissions,  Real  Estate — Campaign  Expenses — Expense, 
Nontaxable  Income — Assessment  of  Stocks — Taxes  paid  by 
Tenant — Life  Insurance  Premiums — Inheritance  Tax — Taxes 
on  Bank  Stock Si~S9 

II.  WITHHOLDING  TAX 

Amended   Law — Nonresident  Alien   Individuals — Nonresident 
Foreign  Corporations — Dividends  to  Nonresident  Alien  Com- 


TABLE   OF   CONTENTS  XI 

PAGE 

panics — Tax — Exempt  Clause — Exemption — Returns  of  Taxes 
Withheld— Indemnity  of  Withholding  Party— Release  of  Taxes 
Withheld — Information  at  Source — Interest  on  Bonds — Aliens, 
Permanent  Residents — Temporary  Residence  in  the  United 
States — Residence,  defined — Visiting  Alien — Wife  Assumes 
Nationality  of  Husband — Stock  Dividends,  Nonresident 
Corporations 60-67 

HI.  INCOME  TAX  AS  APPLIED  TO  PARTNERSHIPS 

IX.  General  Partnerships:  Partnerships  taxable  Individually  only — 
Returns — Fiscal  Year — Dividends  Received  by  Partnerships — 
Method  of  Accounting — Income,  when  Accrued — Premiums 
Life  Insurance  Policies — Credits  on  Individual  Returns  of 

Partners — Partnership  Expenses 68-70 

X.  Limited   Partnerships:    Special    Partners — Profits   of   Limited 

Partnerships 70-71 

IV.  INCOME  TAXES  APPLICABLE  TO  CORPORATIONS 

XI.  General  Provisions:  Domestic  Corporations — Foreign  Corpora- 
tions— Rates — Exemptions — Foreign  Income — Excess  Profits 

Tax — Undistributed  Surplus  Tax — Dividends 72-75 

XH.  Returns  of  Corporations:  Form  of  Return — Return  of  Domestic 
Corporation — Foreign  Corporation — Due  Date — When  last 
Day  falls  on  Sunday  or  Holiday — Signatures  and  Oath  of 
Officers— When  Tax  Payable— Delayed  Payment,  Penalty- 
Fiscal  Year — Designating  Fiscal  Year — Apportioning  Income 
1917 — When  Tax  Payable  Under  Fiscal  Year — Extension  of 
Time— Failure  to  File— False  or  Fraudulent  Return— Refusal 
or  Neglect  to  File — Return  by  Department — Second  Assess- 
ment— Recovery  of  Payment — Publicity — Corporation  In- 
completely Organized — Existing  Corporations — Corporations 
Maintaining  Foreign  Branches — Holding  Companies — Sub- 
sidiary Companies — Receivers,  Trustees,  Assignees — Corpo- 
rations Organized  During  Tax  Year — Corporation  in  Liq- 
uidation— Liability  of  Dissolved  Corporation — Interstate 
Commerce  Corporations — Foreign  Corporations  Represented 

by  Agents — Having  Branches  in  U.  S 75-84 

XHL  Exempt  Organizations:  List  of  all  Classes  of  Corporations  and 
Organizations  Exempt — Required  to  Withhold — Exempt  For- 
eign Organizations — Not  Organized  for  Profit — Corporations 


Xll  TABLE   OF   CONTENTS 

PAGE 
Controlled  by  Exempt  Organizations — Organized  for  Profit — 

Water  Company 84-89 

XIV.  Income  of  Corporations:  Net  Income — Gross  Income:  Manufac- 
turing Corporations — Mercantile — Miscellaneous — Contract- 
ing— All  Sources — Insurance  Companies — Banks — Mutual 
Companies — Dividends — Profit,  Sales  of  Capital  Assets — Ac- 
quired Prior  to  March  i,  1913 — Interest,  Sinking  Funds — As- 
sessment of  Paid-up  Capital  Stock — Exchange  of  Stocks  and 
Bonds,  Reorganization,  Real  Estate  Development  Corpora- 
tion— When  Cost  includes  Carrying  Charges — Instalment 

Business — Timber  Lands,  Stumpage 89-100 

XV.  Deductions  Allowed  Corporations:  Expenses — Losses — When 
Deductible — Property  Acquired  Prior  to  March  i,  1913 — De- 
preciation— Depletion,  Oil  and  Gas  Wells,  Mines — Mainte- 
nance, defined — Renewals — Improvements — Bad  Debts — 
Reserve  for  Bad  Debts — Reserve,  Insurance  Companies — 
Contingent  Reserve — Suspense — Sinking  Fund — Discounts  on 
Sales — Interest,  Limitation — Interest  incurred  in  Purchase  of 
Liberty  Bonds  (4%) — Interest  on  Indebtedness  Secured  by 
Collateral — Interest,  Preferred  Stock — Bonds  of  Corporations 
— Amortization  of  Discount  on  Bonds — Premiums  on  Bonds 
Purchased — Loss  in  Retirement  of  Bonds  at  Premium — Dis- 
count on  Bonds — Life  Insurance  Premiums  Paid  by  Corpora- 
tion— Taxes — Local  Benefits — Taxes  paid  by  Tenant — Salaries 
of  National  Guardsmen — Pensions — Salesmen's  Expenses — 
Service  Connections,  Water  Company — Payments  to  Govern- 
ment— Defalcations — Organization  Expenses — Campaign  Ex- 
penses— Insurance  Companies — Assessment  Insurance  Com- 
panies— Deductions  Allowed  Foreign  Corporations 100-115 

V.  WAR  EXCESS  PROFITS  TAX 

War  Measure — Administration — Who  is  Subject  to  Tax — 
Exempt  Organizations — Principle  of  Tax  Deductions — Ex- 
emptions— Incidence  of  Tax — Duration — Old  Tax  Repealed — 
Rates  of  Taxes  Where  Capital  is  Employed— Rate  of  Tax- 
Nominal  Capital — Taxable  Year — Prewar  Period — Returns  of 
Citizens — Resident  Aliens — Domestic  Corporations — Returns 
of  Nonresident  Aliens  and  Foreign  Corporations — Returns  of 
Domestic  Partnership — Returns  of  Foreign  Partnerships — 
Due  date  of  filing  Returns — Taxes,  Partnerships — Inequity  in 
case  of  Foreign  Partnerships — Returns  of  Net  Income  for 


TABLE    OF   CONTENTS  Xlll 

PAGE 

Prewar  Period  and  Taxable  Year  of  Corporations — Limited 
Partnerships — Net  Income  for  Prewar  Period  and  Taxable 
Year  of  Individuals  and  Partnerships — Occupation,  Salary — 
Land  Owner  Income — Mines,  Oil  Wells,  Timber  Lands — In- 
come from  Investments — Invested  Capital  of  Taxable  Year — 
Exclusions  from  Invested  Capital — Invested  Capital  of  Part- 
nership or  Corporation — Value  of  Tangible  Property,  Partner- 
ships or  Corporations — Patents,  Copyrights,  Partnership  or 
Corporation — Invested  Capital  of  Individuals — Invested  Cap- 
ital of  Foreign  Corporation  or  Partnership  or  Nonresident 
Alien — Liberty  Bonds — Invested  Capital  of  Corporations  and 
Partnerships — Invested  Capital,  Books  of  Account — Where 
Invested  Capital  cannot  be  Determined — Partial  Change  of 
Ownership — Reorganized  or  New  Corporation — Good  Will, 
Trade-marks,  Franchises — Reserve  Accounts,  Reserve  Funds 
— Deductions  to  Citizens,  Domestic  Corporations  and  Partner- 
ships— Deductions  to  Foreign  Corporations  and  Partnerships, 
Nonresident  Aliens — Corporation  or  Partnership  not  in 
Existence  and  Individual  not  in  Trade  in  Prewar  Period — 
Where  Business  Yielded  no  Net  Income  or  Comparatively 
Low  Net  Income — Subnormal  Profits — How  to  Obtain  Benefit 
of  Deduction  Based  on  Income  of  Representative  Concerns — 
Salaries  of  Partners — When  Deductible — Wages  of  Members 
of  Farmer's  Family  not  Deductible — Administration  of  Law — 
Application  of  Law  to  Real  and  Nominal  Capital — Revalua- 
tion of  Property — Notes  on  Items  Contained  in  Examples  of 
Computing  Invested  Capital:  Cash  on  Hand  and  in  Banks — 
Accounts  Receivable — Bills  Receivable — Stock  on  Hand — 
Investments,  Plant  and  Machinery — Furniture  and  Fixtures — 
Land — Buildings — Deferred  Assets,  Prepayments — Liabilities 
— Accounts  Payable — Bills  Payable — Accrued  Liabilities — 
Bonds  Payable — Dividends  Declared — Reserve  for  Amortiza- 
tion of  Bonds — Reserve  for  Contingencies — Reserve  for 
Equalizing  Dividends — Capital  Stock — Surplus — Invested 
Capital — Suggestions  in  Connection  with  the  Valuation  of 
Assets  for  Purposes  of  Invested  Capital:  Organization  Ex- 
penses— Subscriptions  to  Capital  Stock — Treasury  Stock — 
Unexecuted  Contracts — Patents — Trade-marks — Franchise — 
Patterns  and  Designs — Plates  and  Dies — Treasury  Decisions 
under  the  Excess  Profits  Tax:  Inventories  of  Merchandise, 
etc.,  and  Securities  held  by  Dealers — Tangible  and  Intangible 
Property  Defined — Salary  Allowance  to  Partnerships  and  In- 


XIV  TABLE    OF   CONTENTS 

PAGE 

dividuals — Profits  Derived  by  Partners  from  Partnerships — 
Interest  on  Loans  by  Partners — Return,  Prewar  Period — 
Bonds  as  Invested  Capital — Limitation  of  Value  of  Property 
as  at  Jan.  i,  1914 116-174 

VI.  DEPRECIATION 

Depreciation  Deductible  from  Income — Methods  of  Computing 
Depreciation — Reserve  for  Depreciation — Diverting  Reserves 
— Rates  of  Depreciation — Buildings — Building  Repairs — 
Additions — Betterments — Additions  to  Leased  Property — 
Buildings  Erected  by  Tenants — Furniture  and  Fixtures — 
Dwellings — Farm  Buildings — Depletion  of  Mines — Leased 
Mines  on  Royalty — Depletion  of  Oil  and  Gas  Wells — Leased 
Oil  and  Gas  Territory — Machinery — Boilers,  Engines — Re- 
pairs, Replacements — Shafting — Tools — Miscellaneous  Equip- 
ment— Laundry  Equipment — Copyrights — Auto  Trucks — 
Horses — Stable  Equipment — Good  Will — Investments — 
Stocks  and  Bonds — Theatrical  Costumes — Trade-marks — 
Brands,  Stock  on  Hand— Munitions  Works,  War  Materials- 
Ships — Various  Trades  and  Businesses  based  on  Allowances  in 
England:  Boots;  Brewers;  Collieries;  Dyers;  Engineers; 
Hosiery;  Lace  Making;  Looms;  Newspaper  and  Printing; 
Sewing  Machines;  Tramways;  Weaving 175-195 

VH.  BOOKKEEPING  SUGGESTIONS 

Preparation  of  Income  Tax  Returns  of  Corporations:  Method  of 
Bookkeeping — Books  of  Account  Best  Guide  to  Income — 
Examination  of  Books  by  Internal  Revenue  Officers — Ac- 
cruals— Prepayments — Distribution  of  Accounts — Sales — Re- 
turn Sales — Allowances — Discounts  Allowed — Discounts  Re- 
ceived— Rebates — Freight  on  Sales — Freight  on  Purchases — 
Inventories — Rentals — Royalties — Interest  Received — Inter- 
est Paid — Debenture  Bonds — Dividends  Received — Income 
from  Sundry  Sources — Labor,  Wages  and  Commissions — 
Fuel,  Light,  Power,  etc. — Repairs,  Ordinary  and  Incidental — 
Salaries  of  Officers — Sundry  Expense  Accounts — Customs, 
Duties — Loss  by  Fire — Sales  of  Capital  Assets — Depreciation 
— Depletion — Ledger  Entry  of  Depletion  of  Property — Taxes 
— Capital  Stock — Interest  bearing  Indebtedness — Merchandise 
Account — Profit  a»d  Loss  Account — Dividends  Declared — 


TABLE    OF  CONTENTS  XV 

PAGE 

Reconciliation  of  Return  with  Books  of  Account — Manufac- 
turing Corporations  Operating  Cost-System — Inventory 
Equivalent — Materials  and  Supplies  Used 196-218 

APPENDIX  A.  Federal  Income  Tax  Law  Enacted  September  8, 1916,  as 
amended  by  the  Acts  of  March  3,  1917,  and  October  3, 
1917 219-248 

APPENDIX  B.  War  Revenue  Law  Enacted  October  3,  1917 249-284 

APPENDIX  C.  Federal  Corporation  Capital  Stock  Tax  Law  Enacted 

September  8,  1916 285-304 

APPENDIX  D.  Special  Excise  Tax  on  Corporations  Enacted  August  5, 

1909  (Repealed  by  Act  of  October  3, 1913) 305-311 

APPENDIX  E.  Extracts  From  Federal  Income  Tax  Law  Relating  to 
Corporations,  Enacted  October  3,  1913  (Repealed  by 
Act  of  September  8, 1916) 312-319 

APPENDIX  F.  Table  of  Additional  Taxes  (Surtaxes)  Imposed  Upon 

Individuals  by  Income  Tax  of  1913 320 

APPENDIX  G.  New  York  State  Income  Tax  on  Manufacturing  and 

Mercantile  Corporations,  Enacted  June  4,  1917 . .  .321-330 

TABLE  OF  CASES 331 

INDEX 333 


INTRODUCTION 

A  just  and  fair  application  of  income  tax  laws  presents  many 
difficult  problems. 

It  is  unreasonable  to  expect  that  an  income  tax  statute,  or 
Law  and  even  regulations  thereon,  could  work  equitably  as 
Practice.  applied  to  all  cases;  what  proves  to  be  fairness  in 
one  case  may  result  in  hardship  in  another. 

Income  taxation  in  the  United  States — as  a  permanency — 
is  of  comparatively  new  development.  The  Department  in 
charge  of  its  administration  has  proved  itself  eminently  ef- 
ficient. The  present  staff  and  regime,  however,  are  inadequate 
to  provide  for  a  system  of  hearings  and  of  passing  upon  ques- 
tions of  practice  and  procedure  in  cases  requiring  rulings. 

A  thoroughly  successful  and  equitable  administration  of  the 
law  cannot  be  attained  until  there  is  provided  some  local  board 
or  tribunal  to  pass  upon  propositions  in  which  a  technical  ap- 
plication of  the  law  or  regulations  would  work  injustice  to  the 
taxpayer.  This  is  accomplished  in  Great  Britain  through  the 
aid  of  "District"  or  "General"  Commissioners  who  pass  upon 
questions  of  procedure  and  accounting. 

It  is  noteworthy  that  writers  on  the  English  Income  Tax 
emphasize  the  flexibility  of  the  practice  as  compared  with  the 
law.  Mr.  William  Sanders,  in  the  second  edition  of  "The  Prac- 
tice and  Law  of  Income  Tax"  (1916)  states:  "An  outstanding 
feature  of  the  Income  Tax  is  that  the  practice  is  much  more 
liberal  than  the  law."  Again,  he  says:  "The  law  of  Income 
Tax  is,  in  many  respects,  harsh  and  inequitable,  but  much  of 
the  prevailing  hardship  may  be  mitigated  by  an  application 
of  the  practice  in  its  existent  broadness.  It  should,  however, 
be  taken  as  a  general  principle  in  connection  with  the  adminis- 
tration of  the  tax,  that  practically  all  desired  and  accepted 
points  of  equity  which  clash  with  the  law,  are  never  offered 
to  the  public  but  have  to  be  demanded."  Mr.  W.  E.  Snelling 
in  the  second  edition  of  his  "Excess  Profits  Duty"  states:  "It 


XV111  INTRODUCTION 

is  hardly  too  much  to  suggest  that,  in  important  respects  in 
this  connection,  the  Act  necessarily  does  little  more  than  indi- 
cate the  general  direction  which  should  be  followed  in  the  com- 
putation of  taxable  excess.  Within  limits,  the  Legislature  in- 
vites applications  for  the  modification  of  general  rules  which 
peculiar  circumstances  render  inequitable.  The  discretionary 
powers  accorded  to  the  taxing  authority  are  similarly  note- 
worthy." 

As  in  England,  there  cannot  be  a  fair  and  equitable  adminis- 
tration of  income  taxes  in  the  United  States,  without  the  exer- 
cise of  a  reasonable  degree  of  liberality  in  the  practice  by  those 
under  whose  authority  the  law  is  administered.  Until  such 
time  as  local  boards  will  have  been  established  (the  necessity 
for  which  now  appears  imperative)  application  for  special 
rulings  should  be  made  to  the  Commissioner  of  Internal  Revenue 
either  at  Washington,  D.  C.,  or  through  the  local  collector. 

The  Secretary  of  the  Treasury  has  just  announced  the  ap- 
pointment of  a  "Commission  of  Nine  Advisers"  to  interpret 
the  Excess  Profits  Tax  Law,  which  Commission,  it  is  intimated, 
will  also  have  judicial  functions.  This  is  a  step  in  the  right 
direction  and  it  is  hoped  that  further  provision  will  be  made 
throughout  the  States  for  a  system  of  hearings  upon  questions 
that  have  already  been  propounded  in  connection  with  war  tax 
measures. 


TERMS  USED  HEREIN 

AS  DEFINED  BY  INCOME  TAX  LAWS,  DECISIONS  AND  RUL- 
INGS THEREUNDER,  OR  AS  CONSTRUED  FROM  THEIR 
ORDINARY  USAGE 

ABATEMENT  is  a  claim  for  allowance  or  refund  of  taxes. 

"ACCRUAL  BASIS"  refers  to  method  of  account  keeping  and 
manner  of  making  return.  A  return  prepared  on  that  basis 
includes  income  and  expenses  accrued  as  well  as  those 
received  and  disbursed. 

ADDITIONAL  TAXES  OR  SURTAXES  are  the  graduated  or  progres- 
sive taxes  imposed  upon  individuals  by  the  Acts  of  Sep- 
tember 8,  1916,  and  October  3,  1917,  designated  as  the 
Income  Tax  and  War  Income  Taxes,  in  addition  to  the 
Normal  Tax  imposed  thereby.  In  effect,  the  Excess 
Profits  Taxes  on  individuals  and  corporations,  are  also 
additional  taxes  based  upon  income. 

ADDITIONS,  BETTERMENTS  AND  IMPROVEMENTS  are  items  of 
expense  that  add  to  the  value  of  property,  i.  e.,  capital  ex- 
penditures. 

ALIEN.  An  alien  is  a  citizen  or  subject  of  a  country  other  than 
the  United  States.  (See  "Resident  Alien"  and  "Non- 
resident Alien. ") 

AMORTIZATION  refers  to  the  redemption  of  a  liability,  as  the 
amortization  of  bonds;  or  the  reduction  of  an  asset  by 
means  of  a  sinking  fund  or  otherwise. 

ASSET,  refers  to  property  such  as  stock-in-trade,  cash,  accounts 
receivable,  land,  buildings,  machinery,  tools,  stocks,  bonds, 
good  will,  and  so  on.  Some  of  these  are  limited  or  excluded 
as  invested  capital. 

AVERAGE  PREWAR  PROFIT  refers  to  the  amount  deductible  in 
ascertaining  the  sum  subject  to  the  Excess  Profits  Tax; 
it  is  based  upon  profits  earned  during  the  designated  prewar 
years,  1911,  1912  and  1913,  and,  by  limitation  of  law,  the 
rate  cannot  exceed  9  per  cent,  or  be  less  than  7  per  cent,  of 
capital  invested  for  the  taxable  year. 


XX  DEFINITIONS  OF   TERMS 

BAD  DEBTS  are  accounts  or  .bills  receivable  that  are  uncollectible, 
or  only  partly  recoverable  and  bad  debts  as  to  the  uncol- 
lectible part. 

BALANCE  SHEET  is  a  statement  of  assets  and  liabilities  as  at  a 
particular  time. 

BONDED  INDEBTEDNESS  is  a  corporate  obligation  secured  by  a 
bond. 

BONUS  refers  either  to  additional  compensation  paid  for  serv- 
ices rendered  or  to  a  gratuity.  The  circumstances  of  each 
case  will  determine  its  treatment  for  income  tax  purposes. 

CAPITAL  EMPLOYED  is  denned  as  the  entire  capital  paid  in  by 
stockholders,  plus  so  much  of  the  accumulated  surplus 
as  is  not  in  excess  of  the  needs  of  the  business,  but  excludes 
any  borrowed  capital  or  indebtedness. 

CAPITAL  INVESTED  or  INVESTED  CAPITAL  cannot  be  briefly  de- 
fined. (See  page  128.) 

CORPORATION,  under  the  Income  Tax  Acts,  includes  joint-stock 
companies  or  associations  and  insurance  companies. 

DEDUCTIONS  are  the  items  of  expense,  losses  sustained  and  al- 
lowances by  law  permitted  to  be  deducted  from  income 
or  profit  in  ascertaining  the  taxable  amount;  also,  exemp- 
tions to  which  the  taxpayer  is  entitled  by  provision  of  law. 

DEPLETION  is  the  reduction  in  value  of  natural  resources  de- 
ductible in  the  ascertainment  of  net  income. 

DEPRECIATION  is  the  shrinkage  in  value  of  tangible  property 
occasioned  by  use,  deterioration,  wear  and  tear,  etc. 

DIVIDEND  is  a  sum  distributed  or  ordered  to  be  distributed 
among  the  stockholders  of  a  corporation  out  of  its  earnings; 
the  term  is  used  to  denote  the  entire  amount  distributed 
or  ordered  to  be  distributed,  as  well  as  the  portion  received 
or  receivable  by  a  stockholder. 

DOMESTIC  CORPORATION  is  one  "created  under  the  laws  of  the 
United  States,  or  of  any  State,  Territory  or  District 
thereof."  (Section  200,  Excess  Profits  Tax  Law.) 

EXCESS  PROFITS  TAX  is  a  tax  imposed  upon  corporations,  part- 
nerships and  individuals  in  addition  to  the  Income  Tax 
and  War  Income  Tax. 

EXEMPT  ORGANIZATIONS  are  only  those  that  are,  by  classes, 
specifically  enumerated  in  the  law. 


DEFINITIONS  OF  TERMS  XXI 

FISCAL  YEAR  is  the  annual  period  for  which  a  corporation  or 
partnership  makes  its  accounting,  usually  fixed,  respec- 
tively, by  the  by-laws  or  articles  of  copartnership.  In  the 
case  of  an  individual,  with  respect  to  returns  under  present 
income  tax  laws,  it  can  only  be  the  calendar  year. 

FOREIGN  CORPORATION  is  one  created  under  the  law  of  any 
possession  of  the  United  States  other  than  a  State,  Terri- 
tory or  District  thereof,  or  of  any  foreign  country  or  gov- 
ernment. (Section  200,  Excess  Profits  Tax  Law.) 

GOOD  WILL  is  the  value  that  attaches  to  a  business  beyond  its 
tangible  property,  by  reason  of  reputation  or  location. 
Under  the  Excess  Profits  Tax  good  will  may,  where  it  was 
purchased  for  cash  or  property,  be  a  part  of  the  "capital 
invested"  with  limitation  as  to  amount. 

GROSS  INCOME  OR  GROSS  PROFIT  is  usually  the  excess  of  pro- 
ceeds of  sale  of  commodities  dealt  in  over  the  cost  of  goods 
sold,  plus  income  from  other  sources,  without  any  deduc- 
tion in  respect  of  administration  or  distribution  expenses. 

HEAD  OF  FAMILY  is  held  to  be  "a  person  who  actually  supports 
and  maintains  one  or  more  individuals  who  are  closely 
connected  with  him  by  blood  relationship,  relationship  by 
marriage  or  by  adoption  and  whose  right  to  exercise  family 
control  and  provide  for  these  dependent  individuals  is 
based  upon  some  moral  or  legal  obligation."  (T.  D.  2427). 

"INFORMATION  AT  SOURCE"  refers  to  returns  to  be  made  in 
place  of  withholding  at  source  as  heretofore.  Except  in 
respect  of  payments  to  nonresident  alien  individuals  and 
nonresident  alien  corporations,  and  payments  of  interest 
to  citizens  and  resident  aliens  on  obligations  containing  a 
tax  free  covenant  clause,  taxes  need  not  now  be  withheld 
at  the  source  of  payment. 

"  IN  TRADE,"  as  defined  by  the  Treasury  Department,  is  synony- 
mous with  business,  employment,  regular  occupation. 

LIABILITY  is  an  obligation  or  indebtedness. 

LIMITED  PARTNERSHIP  is  a  partnership  that  has  one  or  more 
"special  partners"  whose  liability  is  limited;  it  is  formed 
by  complying  with  State  laws  providing  therefor.  In  the 
application  of  income  tax  laws  it  is  treated  as  a  corpo- 
ration. 


XX11  DEFINITIONS   OF   TERMS 

NET  INCOME,  NET  PROFIT  or  NET  EARNINGS  is  the  excess  of 
gross  income  or  gross  profit  over  and  above  the  sum  of  de- 
ductible expenses  and  losses  allowed  by  law  as  deductions. 
As  applied  to  foreign  corporations  or  partnerships  or  a 
non-resident  alien  individual,  it  refers  only  to  net  income 
received  from  sources  within  the  United  States. 

NONRESIDENT  ALIEN  is  a  citizen  or  subject  of  a  country  other 
than  the  United  States  whose  domicile  is  without  the 
United  States. 

NORMAL  TAXES,  in  the  case  of  individuals,  are  the  flat  rates  01 
taxes  computed  on  the  net  income,  less  dividends  of  cor- 
porations whose  net  income  is  subject  to  tax,  tax  withheld 
at  the  source  and  personal  exemptions.  In  the  case  of 
corporations,  the  normal  taxes  are  those  imposed  upon 
the  entire  net  income  as  determined  by  provision  of  law. 
For  the  purpose  of  normal  tax  no  exemption  is  allowed  to 
corporations.  All  normal  taxes  are  flat  rates — not  pro- 
gressive. 

OCCUPATION,  as  used  in  the  Excess  Profits  Tax,  by  ruling  of  the 
Treasury  Department,  includes  employment,  compensated 
for  by  a  salary.  Persons  receiving  a  salary  are  subject  to 
the  flat  rate  of  the  Excess  Profits  Tax. 

PARTNERSHIP  is  not  defined  in  either  of  the  present  Income  Tax 
Acts.  In  a  liberal  sense,  it  is  the  relation  which  exists 
"between  persons  carrying  on  a  business  in  common  with 
a  view  of  profit."  (See  pages  68  to  71.) 

PREWAR  PERIOD,  as  used  in  the  Excess  Profits  Tax,  refers  to 
years  1911,  1912  and  1913  or  such  of  these  years,  during 
the  whole  of  which,  a  corporation  or  copartnership  was 
in  existence  or  an  individual  was  engaged  in  trade  or 
business. 

PROFIT  AND  Loss  ACCOUNT  is  a  statement  of  the  profit  or  loss 
of  an  undertaking  for  a  given  period  of  time. 

RATES,  refer  to  rates  or  percentages  of  taxes. 

REG.  (Treasury  Regulation)  refers  to  rules  and  regulations  pre- 
scribed by  the  Treasury  Department. 

REORGANIZATION  is  "A  term  applied  to  the  formation  of  a  new 
corporation  by  the  creditors  and  shareholders  of  a  corpora- 
tion which  is  in  financial  difficulties,  for  the  purpose  of 


DEFINITIONS  OF  TERMS  XX111 

purchasing  the  company's  works  and  other  property,  after 
the  foreclosure  of  a  mortgage  or  judicial  sale."    (34  Cyc. 

1336.) 

RESERVE  denotes  an  amount  set  aside  from  profits  for  a  par- 
ticular purpose  or  to  meet  contingencies.  (See  Reserve 
Account  and  Reserve  Fund.) 

RESERVE  ACCOUNT  represents  an  amount  charged  to  Profit  and 
Loss  (deducted  from  profit)  in  determining  the  true  or  net 
profit.  Comparatively,  such  an  account  is  a  fictitious 
reserve  in  that  it  is  usually  a  reduction  of  the  book  value 
of  the  asset  (property  account)  to  which  it  relates.  (See 
"Reserve  for  Depreciation.") 

RESERVE  FUND  represents  an  amount  set  aside  from  profits  and 
segregated  in  the  assets  or  set  apart  from  other  assets;  for 
example,  cash  deposited  in  a  separate  bank  account  or 
invested  in  outside  securities.  Comparatively,  a  reserve 
fund  is  a  real  reserve  in  that  it  is  actually  set  apart  from 
other  property. 

RESERVE  FOR  DEPRECIATION  is  an  account  that  represents  the 
amount  of  depreciation  of  property  deducted  from  profits. 
It  is  a  fictitious  reserve  in  that  it  is  merely  the  measures  by 
which  the  asset  account  (property  account)  has  been  re- 
duced by  depreciation  charged  off. 

"RESIDENCE"  or  "PLACE  OF  RESIDENCE"  is  one's  permanent 
home  or  domicile  as  distinguished  from  lodging  or  tem- 
porary abode. 

RESIDENT  ALIEN  is  a  citizen  or  subject  of  a  country  other  than 
the  United  States  whose  domicile  is  within  the  United 
States. 

"RETURN"  is  a  report  of  net  income  prepared  in  the  form  pre- 
scribed by  law. 

SALARY  refers  to  compensation  paid  for  services  rendered;  the 
amount  is  fixed  hi  advance,  at  a  sum  certain,  for  a  definite 
period  of  time. 

SURPLUS  or  SURPLUS  PROFITS  is  the  excess  of  assets  over  and 
above  the  sum  of  liabilities  and  capital.  It  may  or  may 
not  include  reserves,  according  to  the  nature  of  them. 

SURTAXES  or  SUPERTAXES  are  the  taxes  imposed  upon  in- 
dividuals under  the  Acts  of  September  8,  1916,  and  Oc- 


XXIV  DEFINITIONS    OF   TERMS 

tober  3,  1917,  in  addition  to  the  normal  tax.  (See  "Ad- 
ditional Taxes.") 

TAX  FREE  COVENANT  CLAUSE  is  a  contract  or  provision  in  a 
bond  by  which  the  obligor  agrees  to  pay  the  tax  on  the 
income  from  such  bond  or  part  thereof  imposed  upon  the 
obligee,  whereby  the  obligor  agrees  to  reimburse  the  ob- 
ligee therefor. 

T.  D.  (Treasury  Decision)  designates  a  ruling  under,  or  inter- 
pretation of,  the  law  by  the  Treasury  Department,  which 
has  the  effect  of  law. 

TRADE  and  BUSINESS,  under  the  Excess  Profits  Tax,  include 
professions  and  occupations. 

UNDIVIDED  PROFITS  of  a  corporation  refer  to  the  difference  be- 
tween the  net  earnings  and  dividends  paid  or  declared 
therefrom. 

UNITED  STATES  "means  only  the  States,  the  Territories  of 
Alaska  and  Hawaii  and  the  District  of  Columbia."  (Sec- 
tion 200,  Excess  Profits  Tax.) 

WITHHOLDING  AT  SOURCE  refers  to  the  deduction  of  the  normal 
tax  by  the  payer  of  income  and  paying  the  same  to  the 
Government  officials  authorized  to  receive  the  same. 

WITHHOLDING  AGENT  is  one  who  is  required  to  withhold  the 
normal  tax  from  the  income  of  another  of  which  he  has  the 
custody  or  disposal. 


INCOME  TAX  LAW  AND  ACCOUNTING 


CHAPTER  I 
TAXES   APPLICABLE   TO   INDIVIDUALS 

I.  GENERAL  PROVISIONS  OF  LAW 

The  Federal  Income  Tax  Law,  enacted  September  8,  1916, 
as  amended,  by  Act  of  October  3,  1917,  comprises  Income 
the  present  Income  Tax  Law.  Tax» 

In  addition  to  the  present  income  taxes,  the  Act  of  October  3, 
1917,  imposes  upon  citizens  and  residents  of  the  United  States 
a  War  Income  Tax  which  is  computed  upon  the  War  In- 
same  net  income  as  that  upon  which  the  Income  come  Tax. 
Tax  is  levied,  but  with  different  amounts  of  exemptions,  an  ad- 
ditional normal  tax,  and  at  different  rates  of  surtaxes. 

The  Act  of  October  3,  1917,  provides,  also,  for  WarEx- 
the  imposition  of  a  War  Excess  Profits  Tax  upon  net  cess  Profits 
income,  less  a  deduction.    (See  page  116.) 

All  of  the  aforementioned  taxes  are  applicable  to  income  of  the 
entire  year  1917;  the  amendments  to  the  Income  Tax  Law  of 
September  8,  1916,  the  War  Income  Tax  and  the  When 
War  Excess  Profits  Tax,  enacted  October  3,  1917,  Effective, 
are  retroactive  and  effective  as  of  January  i,  1917. 

II.  INCOME  TAX  (ACT  OF  SEPTEMBER  8,  1916) 

Every  citizen  of  the  United  States,  irrespective  of  his  place 
of  residence,  at  home  or  abroad,  and  every  resident  of  the 
United  States,  shall  pay  the  tax  upon  his  entire  net  Who  is 
income  received  from  all  sources,  in  the  preceding  j^me  ** 
calendar  year;  and  every  nonresident  alien  shall  pay  Tax. 
the  tax  upon  his  entire  net  income  received  from  all  sources 
within  the  United  States;  less  the  credits  and  exemptions  to 
which  such  persons  shall,  respectively,  be  entitled  under  the  law. 


_    x    ,  INCOME  TAX—  LAW  AND  ACCOUNTING 

The  tax  on  the  income  of  individuals  is  composed  of  two 
Division  of  parts,  designated  the  "normal  tax"  and  the  "ad- 


Tax. 


Normal 
Tax. 


Dividends. 


ditional  tax,"  or  "surtax." 

The  normal  tax  imposes  the  fixed  annual  rate  of 
2  per  cent,  upon  the  entire  net  income  of  individuals, 
except, 

1.  Income  derived  from  dividends  on  the  capital  stock  or 

net  earnings  of  corporations,  joint-stock  companies 
or  associations,  or  insurance  companies,  on  which 
the  normal  tax  is  paid  by  such  companies  or  associations; 

2.  The  personal  exemption  of  $3,000  per  annum  to  an  un- 
married person  and  $1,000  additional  to  a  head  of  a  family,1  or 
Personal      to  a  married  man  with  a  wife  living  with  him,  or  to 
Exemp-        a  married  woman  with  a  husband  living  with  her, 
tions.  provided,  however,  that  only  one  $4,000  shall  be 
allowed  to  both  husband  and  wife  from  their  aggregate  income. 
(A  nonresident  alien  is  not  allowed  a  personal  exemption) ; 

3.  An  additional  exemption  of  $200  to  the  head  of  a  family 
(allowable  only  to  one  parent  of  the  same  family)  for  each  de- 
pendent child  under  the  age  of  eighteen  years,  or  if  incapable 
of  self-support  by  reason  of  being  mentally  or  physically  defec- 
tive regardless  of  age. 

The  additional  tax  is  imposed  upon  all  net  income  of  the  in- 
dividual, including  that  received  as  dividends  on  capital  stock 
Additional  or  from  net  earnings  of  corporations,  joint-stock 
Tax.  companies  or  associations,  or  insurance  companies, 

in  excess  of  $20,000,  upon  the  progressive  scale,  as  follows: 

On  amounts  in  excess  of: 

$20,000  and  not  in  excess  of  $40,000 i  per  cent. 

60,000 2 

80,000 3 

100,000 4 

150,000 5 

200,000 6 

250,000 7 

300,000 8 

a  person  who  actually  supports  and  maintains 


40,000 

60,000 

80,000 
100,000 
150,000 
200,000 
250,000 
1 A  head  of  a  family  is 


one  or  more  individuals  who  are  closely  connected  with  him  by  blood  rela- 
tionship, by  marriage  or  by  adoption,  and  whose  rights  to  exercise  family 
control  and  provide  for  these  dependent  individuals  is  based  upon  some 
moral  or  legal  obligation."  T.  D.  2427. 


TAXES  APPLICABLE   TO  INDIVIDUALS  3 

$300,000    and  not  in  excess  of    500,000 9  per  cent. 

500,000       " 


1,500,000  "2,000,000 12    ' 

2,000,000 I3      "        " 

III.  WAR  INCOME  TAX  (ACT  OF  OCTOBER  3,  1917) 

Every  citizen  of  the  United  States,  irrespective  of  his  place 
of  residence,  at  home  or  abroad,  and  every  resident  of  the 
United  States,  shall  pay  the  tax  upon  his  net  in-  Who  is 
come  received  from  all  sources  in  the  preceding  ^^.J^to 
calendar  year,  less  the  credits  and  exemptions  to  come  Tax. 
which  such  person  shall,  by  law,  be  entitled. 

The  War  Income  Tax  law  is  not  applicable  to  nonresident 
aliens. 

The  War  Income  Tax,  as  in  the  case  of  the  Income  Tax,  is 
divided  into  two  parts,  the  normal  and  the  addi-  Division 
tional  tax.  of  Tax. 

The  normal  war  income  tax  is  fixed  at  the  flat  rate  of  2  per 
cent,  upon  the  entire  net  income  of  individuals,  Normal 
except:  Tax. 

1.  Income  derived  from  dividends  on  the  capital  stock  or 
net  earnings  or  corporations,  joint-stock  companies  _..  .. 

or  associations,  or  insurance  companies,  on  which 
the  normal  tax  is  paid  by  such  companies  or  associations; 

2.  The  personal  exemption  of  $1,000  per  annum  to  the  un- 
married person  and  $2,000  to  the  head  of  a  family  or  to  a  mar- 
ried man  with  a  wife  living  with  him,  or  to  a  married  Personal 
woman  with  a  husband  living  with  her;  provided,  Exemp- 
however,  that  only  one  deduction  of  $2,000  shall  be  tions- 
allowed  to  both  husband  and  wife  from  their  aggregate  incomes; 

3.  An  additional  exemption  of  $200  to  the  head  of  a  family 
(allowable  only  to  one  parent  of  the  same  family)  for  each  de- 
pendent child  under  the  age  of  eighteen  years,  or  if  incapable 
of  self-support,  because  mentally  or  physically  defective. 

The  additional  tax  under  the  War  Income  Tax  Law  is  im- 
posed against  the  entire  net  income  of  individuals,    Additional 
including  that  received  as  dividends  on  capital  stock    Tax- 
or  from  net  earnings  of  corporations,  joint-stock  companies 


4  INCOME    TAX — LAW  AND  ACCOUNTING 

or  associations,  or  insurance  companies,  in  excess  of  $5,000 
upon  a  graduated  scale,  as  follows: 

On  amounts  in  excess  of: 

$5,000  and  not  in  excess  of  $7,500 i  per  cent. 

7,500    "      "    "      "       "  10,000 2    "      " 

10,000    "      "    "      "      "  12,500 3    "     " 

12,500    "      "    "      "       "  15,000 4    "      " 

15,000    "      "    "      "       " 


20,000  '                                     40,000 7  ' 

40,000  "  "  "  "  "       60,000 10  "  " 

60,000  "  "  "  "  "       80,000 14  "  " 

80,000  "  "  "  "  "     100,000 18  "  " 

IOO,OOO  "    "   "    "    "   I5O,OOO 22   "   " 

150,000  "    "   "    "    "   200,000 25   "   " 

200,000  "    "   "    "    "   250,000 30  "    " 

"   "  300,000 34  "  " 

"   "  500,000 37  "  " 

"   "  750,000 40  "  " 

750,000  "   «  "   "   "1,000,000 45  "  " 

In  excess  of  $1,000,000 50  "  " 

IV.  INCOME  TAX  AND  WAR  INCOME  TAXES 

COMBINED    RATES    AND    EXAMPLES    OF    THEIR    APPLICATION    TO 

INCOMES 

Under  the  combined  administration  of  both  Acts,  herein- 
Exemp-  before  mentioned,  all  persons  will  receive  credit 
tions.  for  the  exemptions  to  which  they  are,  respectively, 

entitled  under  each  Act,  as  follows: 

Act  of  Act  of 

Sept.  8,  Oct.  3, 

1916  1917 

Unmarried  person $3,000.00  $1,000.00 

Married  person  or  head  of  family      4,000 .  oo  2,000 .  oo 

The  normal  tax  under  each  of  the  Acts  is  2  per  cent.,  making 
Combined  a  total  normal  tax  of  4  per  cent,  upon  the  entire 
Normal  net  income,  less  the  respective  exemptions,  and, 
Taxes.  under  the  combined  administration  of  both  Acts 
the  normal  taxes  are,  in  the  case  of, 


TAXES  APPLICABLE   TO  INDIVIDUALS  5 

Unmarried  persons: 

Two  per  cent,  on  amounts  in  excess  of  $1,000  and  not  in 
excess  of  $3,000. 

Four  per  cent,  on  amounts  in  excess  of  $3,000. 
Married  persons  or  heads  of  families: 

Two  per  cent,  on  amounts  in  excess  of  $2,000  and  not  in  excess 
of  $4,000. 

Four  per  cent,  on  amounts  in  excess  of  $4,000. 

The  combined  additional  taxes  under  both  Acts  Combined 
are  as  follows:  Additional 

laxes. 


Act  of  Act  of  Total 

Sept.  8,  Oct.  3,  Rates 

1916  1917 

Per  Cent.  Per  Cent.  Per  Cent. 


On  amounts  in  excess 

of: 

$5,000  and  not  in  e; 

xcess  of       $7,500 

none 

I 

i 

none 

2 

2 

10,000     "      "    " 

"      "       12,500 

none 

3 

3 

12,500     "      "    " 

"      "       15,000 

none 

4 

4 

15,000     "      "    " 

"      "       20,000 

none 

5 

5 

20,000      "         "     " 

"      "       40,000 

i 

7 

8 

40,000    "     "  " 

"      "       60,000 

2 

10 

12 

60,000  "    "  " 

"      "       80,000 

3 

14 

17 

80,000  "    "  " 

"      "     100,000 

4 

18 

22 

100,000      "         "     " 

"      "     150,000 

5 

22 

27 

150,000    "      "   " 

"      "     200,000 

6 

25 

31 

200,000      "         "     " 

"      "     250,000 

7 

30 

37 

250,000    "      "    " 

"      "     300,000 

8 

34 

42 

300,000  "    "  " 

"      "     500,000 

9 

37 

46 

500,000  "    "  " 

"      "     750,000 

10 

40 

So 

750,000   "     "  " 

"        "  1,000,000 

10 

45 

55 

1,000,000     "      "    " 

"    "  1,500,000 

ii 

50 

61 

1,500,000   "     "  " 

"      "  2,000,000 

12 

50 

62 

2,000,000  .  . 

M 

j?o 

6j 

The  following  examples  illustrate  the  method  of  computing 
the  normal  and  additional  taxes  imposed  by  the  Income  Tax, 
as  amended,  and  the  War  Income  Tax,  enacted  respectively, 
September  8,  1916,  and  October  3,  1917. 


6  INCOME   TAX— LAW  AND  ACCOUNTING 

EXAMPLE  OF  COMPUTING  THE  NORMAL  TAX  OF  AN  UNMARRIED  PERSON 
WITH  A  NET  ANNUAL  INCOME  OF  $5,000 

Net  Taxable  Income $5,000 . oo 

Personal  exemption 1,000.00 

Subject  to  Normal  Tax $4,000.00 

As  follows: 

2%  of  (amount  over  $1,000  and  not  over 

$3,000)  $2,000 $40.00 

4%  of  (amount  over  $3,000  and  not  over 

$5,000)  $2,000 80.00 


Amount  subject 
to  tax .  $4,000 


Total  Tax $    120.00 

Or,  otherwise  stated: 

2%  of  ($5,000  less  exemption  of  $3,000)  $2,000.  .....     $40.00 

2%  of  ($5,000  less  exemption  of  $1,000)  $4,000 80.00 

Total  Tax..  $    120.00 


EXAMPLE  OF  COMPUTING  THE  NORMAL  TAX  OF  A  MARRIED  PERSON  WITH 
A  NET  ANNUAL  INCOME  OF  $5,000 

Net  Taxable  Income $5,000 .  oo 

Personal  exemption 2,000 .  oo 

Subject  to  Normal  Tax $3,000 .  oo 

As  follows: 

2%  of  (amount  over  $2,000  and  not  over 

$4,000)  $2,000 $40.00 

4%  of  (amount  over  $4,000  and  not  over 

$5,000)  $1,000 40.00 


Amount  subject  to 
tax.  . .  .$3,000 


Total  Tax $       80.00 

Or  otherwise  stated: 

2%  of  ($5,000  less  exemption  of  $4,000)  $1,000 $20.00 

2%  of  ($5,000  less  exemption  of  $2,000)  $3,000 $60.00 

Total  Tax..  $       80.00 


TAXES  APPLICABLE   TO  INDIVIDUALS  7 

EXAMPLE  OF  COMPUTING  NORMAL  AND  ADDITIONAL  TAXES  OF  AN  UNMARRIED 
PERSON  WITH  A  NET  ANNUAL  INCOME  OF  $25,000 

Net  Taxable  Income $25,000 .  oo 

Normal  Tax: 

2%  of  (amount  in  excess  of  $1,000  and  not  in 

excess  of  $3,000)  $2,000 $  40 .  oo 

4%  of  (amount  in  excess  of  $3,000  and  not  in 

excess  of  $25,000)  $22,000 880.00 


Subject  to  Normal 

Tax $24,000 


Normal  Tax $     920.00 

Or,  otherwise  stated: 

2%  of  ($25,000  less  exemption  of  $3,000)  $22,000  .  .  $440.00 
2%  of  ($25,000  less  exemption  of  $1,000)  $24,000  . .  480.00 
Normal  Tax $920.00 

ADDITIONAL  TAX  (COMBINED) 

On  amount  in  excess  of: 

$5,000  and  not  in  excess  of  $7,500  =  $2,500  @  i%,  $25.00 
7,500  "  "  "  "  "  10,000  =  2,500  @  2%,  50.00 
10,000  "  "  "  "  "  12,500  =  2,500  @  3%,  75.00 
12,500  "  "  "  "  "  15,000  =  2,500  @  4%,  100.00 
15,000  "  "  "  "  "  20,000  =  5,000  @  5%,  250.00 
20,000  "  "  "  "  "  25,000  =  5,000  @  8%,  400.00 

Additional  or  Surtax $     900 .  oo 

Total  Tax $  1,820.00 

EXAMPLE  OF  COMPUTING  NORMAL  AND  ADDITIONAL  TAXES  OF  A  MARRIED 
PERSON  WITH  A  NET  ANNUAL  INCOME  OF  $50,000 

Net  Taxable  Income $50,000 .  oo 

Normal  Tax: 
2%  of  (amount  in  excess  of  $2,000  and  not  in 

excess  of  $4,000)  $2,000 $   40.00 

4%  of  (amount  in  excess  of  $4,000  and  not  in 

excess  of  $50,000)  $46,000 1,840 .  oo 


Subject  to  Normal 

Tax $48,000 


8  INCOME   TAX— LAW  AND  ACCOUNTING 

Normal  Tax $  1,880 .  oo 

Or,  otherwise  stated : 

2%  of  ($50,000  less  exemption  of  $4,000)  $46,000. .     $  920.00 

2%  of  ($50,000  less  exemption  of  $2,000)  $48,000. .       960.00 

Normal  Tax $1,880.00 

ADDITIONAL  TAX  (COMBINED) 

On  amount  in  excess  of: 

$5,000  and  not  in  excess  of  $7,500  =  $2,500  ©  i%,  $25.00 

7,500    "      "    "      "  "  10,000  =    2,500  ©  2%,  50.00 

10,000    "      "    "      "  "12,500=    2,500  ©  3%,  75.00 

12,500    "      "     "      "  "  15,000  =    2,500  ©  4%,  100.00 

15,000    "      "    "      "  "  20,000  =    5,000  @  5%,  250.00 

20,000    "      "    "      "  "40,000  =  20,000©  8%,  1,600.00 

40,000  "    "   "    "    "  50,000  =  10,000  @  12%,  1,200.00 


Amount  subject  to  surtax $45,000 

Additional  or  Surtax $  3,300.00 

Total  Tax $  5,180.00 


EXAMPLE  OF  COMPUTING  NORMAL  AND  ADDITIONAL  TAXES  WHERE  INCOME 
INCLUDES  TAX-EXEMPT  INTEREST  AND  DIVIDENDS  OF  CORPORATIONS 

Assuming  a  married  man,  living  with  his  wife,  and  having  three  children 
under  the  age  of  eighteen  years,  with  an  income  for  the  year  1917  of : 

Salary $25,000 .  oo 

Interest  on  tax  exempt  bonds  (U.  S.  and  Municipal) 2,500 .  oo 

Dividends  of  corporations 15,000 .  oo 

Interest  on  mortgages 5,ooo .  oo 


Total  Income $47,500 .  oo 

Excess  Profits  Tax  creditable: 1 

Salary $25,000.00 

Exemption 6,000.00 


Tax,  8  per  cent,  of $19,000.00        1,520.00 


Total  Income  less  credit  of  Excess  Profits  Tax $45,980 .  oo 

Computed  as  follows: 

1  For  method  of  computing  excess  profits  tax,  see  page  142. 


TAXES  APPLICABLE    TO  INDIVIDUALS  9 

NORMAL  TAX 

Total  Income  less  Excess  Profits  Tax $45,980.00 

Less  items  not  taxable: 

Interest  on  Government  Bonds $2,500.00 

Dividends  of  Corporations 15,000.00       17,500.00 

Amount  taxable,  subject  to  exemptions $28,480.00 

Exemptions: 

Exempt  under  War  Income  Tax $2,000.00 

For  3  children 600.00       2,600.00 

Amount  subject  to  Normal  Taxes $25,880.00 

As  follows: 

2%  of  amount  over  $2,600 

and  not  over  $4,600 $2,000.00  $40.00 

4%  of  amount  over  $4,600 

and  not  over  $28,480 23,880.00  _       955.20 

Subject  to  Normal  Tax $25,880.00 

Normal  Tax $995 . 20 

Or,  otherwise  stated: 

2%  of  ($28,480  less  exemption 

of  $4,600) $23,880.00         $477-6o 

2%  of  ($28,480  less  exemption 

of  $2,600) 25,880.00         517.60 

Normal  Tax $995  •  20 

ADDITIONAL  TAX  (COMBINED) 

Total  Income  less  credit  of  Excess  Profits  Tax $45,980.00 

Less  Interest  on  U.  S.  Gov't  and  Municipal  Bonds 

(Exempt) l 2,500 .  oo 

Balance $43,480.00 

Taxable  as  follows:  On  amount  in  excess  of: 
$5,000  and  not  in  excess  of  $7,500  =  $2,500  ©  i%,  $25 .00 
7,500  "  "  "  "  "  10,000  =  2,500  @  2%,  50.00 
10,000  "  "  "  "  "  12,500=  2,500©  3%,  75.00 
12,500  "  "  "  "  "15,000=  2,500©  4%,  100.00 
15,000  "  "  "  "  "  20,000  =  5,000  @  5%,  250.00 
20,000  "  "  "  "  "  40,000  =  20,000  @  8%,  1,600.00 

40,000     "         "      "          "         "43,480=      3,480@  12%,       417.60 


Amount  subject  to  surtax $38,480 

Additional  or  Surtax $2,517 . 60 

Total  Normal  and  Additional  Taxes $3,512 . 80 

1This  item  represents  income  from  municipal  and  U.  S.  Government 
bonds.    As  to  deducibility  of  interest  on  Liberty  Loan  bonds,  see  page  41. 


10 


INCOME   TAX— LAW  AND  ACCOUNTING 


TABLE  OF  NORMAL  AND  ADDITIONAL  TAXES  IMPOSED  BY  THE  INCOME  TAX 
AND  WAR  INCOME  TAX  LAWS  UPON  NET  INCOME  OF  MARRIED  PERSONS 
OR  HEADS  OF  FAMILIES,  ON  AMOUNTS  AS  FOLLOWS  : 


Amount 

of 
Income 


Combined  Normal 

Taxes  Imposed 

by  Income  and 

War  Income  Tax 

Laws  less  Personal 

Exemptions 


Combined  Addi- 
tional Taxes 
Imposed  by 
Income  and  War 
Income  Tax  Laws 


Total  Combined  Normal  and 
Additional  Taxes 


A  mount  Per  cent 


$2,000  
•j  OOO 

,  .  .  None  
20  oo 

.  .  None  
None  

.  .None.  .  .  . 
20  .  oo  . 

oo 

.67 

A  OOO 

AQ     OO 

None 

40  oo 

I    OO 

e  OOO 

80.00  

.  None  

80.00. 

1  .  60 

6  ooo 

1  2O  OO    .  .  . 

10.00  

130.00. 

....   2.17 

7  OOO 

1  60  oo 

20  oo   .  . 

180.00. 

2    <C7 

8  ooo 

200.00  

35.00.  . 

23C..OO. 

....    2  .  94 

O  OOO 

24O   OO 

">C,  .OO.  . 

20  5  .OO. 

.3.28 

IO  OOO 

280  oo 

7?   oo    . 

3SC..OO. 

.    3.  "><» 

I<C  OOO 

480  oo 

250  oo 

730  oo 

4   87 

20  ooo 

680  oo.  .  .  . 

500.00  

1,  180.00. 

.    s  -QO 

oe  ooo 

880  oo 

QOO   OO.  .  .  . 

1,780.00. 

.    7.12 

20,000 

1,080.00  

I,3OO.OO  

2,380  .  oo  . 

....   7  .  94 

i  280  oo 

I  7OO   OO 

2  080   OO 

8  51 

OO>UWVJ  

2  IOO   OO 

3r8o   OO 

8  CK 

A?  OOO 

i  680  oo 

2  7OO   OO     . 

4,380.00. 

.    0-73 

50,000  

1,880.00  

3,300.00  
•2  QOO    OO 

5,180.00. 

r  080   OO 

...  .10.36 
10  87 

OO>(-*~"-'  

60  ooo 

2  280   OO 

4  SOO   OO.  . 

6,780.00. 

6^  ooo 

2  480   OO 

f  2  CO    OO 

7,830.00. 

.  .  12  .CX 

2  680   OO 

6  200  oo 

8,880.00. 

12.68 

/<J,U«_KJ  

7«;,ooo.  . 

2,880.00  

7,050.00  

9,930  .  oo  . 

...  .13.24 

80  ooo 

•3  080   OO 

7  OOO   OO     . 

10,980.00. 

.  .13.72 

3280  oo 

O  OOO   OO 

12,280.00. 

.  .  14.4^ 

oo  ooo 

•?  4.80  oo 

10,100.00  

13,580  oo. 

...  .15.09 

95,000  

IOO  OOO 

3,680.00  
3,880  oo 

11,200.00  
12,300.00  

14,880.00. 
16,180.00. 

....15.66 

16.18 

I2C.  OOO 

4  880   OO 

23,930.00. 

.  .  .  .19.15 

c  880  oo 

2<  8OO    OO 

31  680  oo 

.  ...  21  .  12 

I7S.OOO.  . 

6,880.00.  . 

33,550.00.  . 

40,430.00. 

..23.10 

RETURNS   OF   INDIVIDUALS  II 


Combined  Addi-  Total  Combined  Normal  and 

Additional  Taxes 


Income  Tax  Laws 

Amount  Per  cent 


$200,000 7,880.00 41,300.00 49,180.00 24.59 

250,000 9,880.00 59,800.00 69,680.00 27.87 

300,000 11,880.00 80,800.00 92,680.00 30-89 

350,000 13,880.00 103,800.00 117,680.00 33.62 

400,000 15,880.00 126,800.00 142,680.00 35-67 

450,000 17,880.00 149,800.00 167,680.00 37-26 

500,000 19,880.00 172,800.00 192,680.00 38.53 

600,000 23,880.00 222,800.00 246,680.00 41.11 

700,000 27,880.00 272,800.00 300,680.00 42-95 

800,000 31,880.00 325,300.00 357,180.00 44.65 

900,000 35,880.00 380,300.00 416,180.00 46.24 

1,000,000 39,880.00 435,300.00 475,180.00 47-52 

2,000,000 79,880.00 1,050,300.00 1,130,180.00 56. 51 

3,000,000 119,880.00 1,680,300.00 1,800,180.00 60.00 

NOTE.  The  amounts  of  Excess  Profits  Tax  Assessments  are  deductible 
from  the  net  income  before  computing  the  Income  and  War  Income  Taxes 
shown  above.  (See  page  142.) 

V.  RETURNS  OF  INDIVIDUALS 

In  the  administration  of  the  Income  Tax  Law,   enacted 
September  8,  1916,  as  amended,  and  the  War  In-  Combined 
come  Tax  Law,  enacted  October  3,  1917,  the  require-  Return. 
ments  of  these  laws  will  be  combined  in  one  form  of  return. 

Every  person,  a  citizen  or  resident  of  the  United  States,  hav- 
ing received  from  all  sources,  a  net  income  during  the  calendar 

year  1017,  and  every  calendar  year  thereafter,  in  WhoisRe- 
t  f  •    i  auired  to 

the  case  of:  an  unmarried  person,  $1,000  or  more;  Make 

a  married  person  or  head  of  a  family,  $2,000  or  Return, 
more;  will  be  required  to  make,  execute  and  file  a  return  of  net 
income.  l 

A  "return"  is  the  statement  or  report  of  income  Return 
upon  which  the  Government  basis  the  tax  assess-  Fonn. 
ment. 

1  Individuals  are  not  permitted  to  file  returns  for  any  period  other  the 
calendar  year. 


12  INCOME   TAX — LAW  AND  ACCOUNTING 

There  is  no  obligation  upon  the  part  of  the  Government  to 
seek  out  those  who  are  taxable  or  to  send  the  necessary  blanks 
No  Obliga-  to  those  of  whom  returns  are  required.  It  is  in- 
tion  Upon  cumbent  upon  each  individual  to  obtain  the  blank 
ment^'  from  the  Collector  of  his  district  or  from  the  Corn- 
Send  Out  missioner  of  Internal  Revenue,  Washington,  D.  C., 
Blanks.  jf  ne  js  required,  under  the  law,  to  file  a  return. 

Income  of  the  husband  and  wife,  if  not  living  apart,  may  be 
returned  in  one  report. 

Return  by  If  the  aggregate  income  of  both  husband  and 
Husband  wife  is  $2,000  or  more  for  the  calendar  year  a  return 
and  wife.  Qf  ^eir  combined  incomes  or  separate  returns  of 
their  respective  incomes  must  be  made.  When  separate  returns 
are  made  the  exemption  may  be  prorated  by  agreement  between 
them  but  the  aggregate  exemption  deducted  shall  not  exceed 

$2,000. 

Where  the  income  of  husband  and  wife  exceeds  $5,000  per 
annum,  they  should  make  separate  returns  because  the  addi- 
tional or  surtax  is  computed  on  the  separate  income  of  each 
individual. 

The  regulations  of  the  department  requiring  the  incomes 
of  husband  and  wife  to  be  combined  and  authorizing  the 
aggregate  exemption  of  ($4,000)  $2,000  from  such  com- 
bined income  are  applicable  for  the  purpose  of  the  normal 
tax  only.  The  additional,  or  surtax,  imposed  by  the  act 
will  be  computed  on  the  basis  of  the  separate  income  of  each 
individual;  that  is,  on  the  amount  of  each  individual's  in- 
come in  excess  of  the  minimum  amounts  upon  which  the 
surtax  at  the  graduated  rate  is  to  be  calculated.  (T.  D. 
2090.) 

The  separate  incomes  of  husband  and  wife  should  not  be 
combined  in  a  return  of  income  for  the  purpose  of  assessing 
the  additional  or  surtax.  (T.  D.  2137.) 

All  persons  and  corporations  acting  in  a  fiduciary  capacity, 
such  as  guardians,  trustees,  executors,  administrators,  receivers, 
Returns  conservators,  must  make  and  render  a  return  of  net 
by  Fi-  income  of  the  person,  trust  or  estate  for  whom  or 
duciaries.  which  they  act  (Form  IO4I>  Revised)  and  are  sub- 
ject to  all  the  provisions  in  regard  thereto  that  apply  to  in- 


RETURNS  OF  INDIVIDUALS  13 

dividuals.  Where  there  is  more  than  one  person  or  corporation 
acting  in  a  fiduciary  capacity,  the  return  of  one  is  sufficient, 
provided  that  such  return  is  a  complete  report  upon  all  income 
received. 

The  fiduciary  should  only  account  for  income  received  through 
him  except  where  he  acts  as  agent  or  attorney  in  fact  for  the 
beneficiary. 

As  each  such  fiduciary  acts  solely  in  behalf  of  the  ben- 
eficiaries of  the  trust,  the  annual  return  required  in  such 
cases  has  reference  only  to  the  income  accruing  and  payable 
through  said  fiduciary,  and  not  to  the  income  of  the  ben- 
eficiary derived  from  other  sources.  If,  however,  such 
fiduciary  is  legally  authorized  to  act  for  such  beneficiary  as 
agent  or  attorney  in  fact,  he  may  in  such  case  also  make  for 
the  beneficiary  the  personal  annual  return  (Form  1040) 
required  by  law.  (Art.  72,  Reg.  33.) 

Unless  the  beneficiary  is  under  some  disability  which 
requires  the  fiduciary  to  act,  the  beneficiary  will  make  his 
own  return  and  account  for  the  tax  upon  his  entire  net 
income.  (T.  D.  2090.) 

An  executor  or  administrator  is  required  to  make  a  return 
of  the  income  received  by  the  decedent  for  the  period  from 
the  first  day  of  January  to  the  date  of  the  decedent's  death. 
(Form  1040  Revised.) 

A  person  acting  under  a  power  of  attorney  is  not  construed 
to  be  a  fiduciary  and  is  not  required  to  render  return  of  receipts 
and  disbursements  in  his  representative  capacity.  Agent 
Should  he,  however,  have  title  to  property,  from  ^C  def 
which  there  is  income,  irrespective  of  actual  owner-  Power  of 
ship,  he  must  make  return  of  such  income.    A  prop-  Attorney, 
erty  owner  cannot  conceal  his  income  by  assigning  it  to  a  repre- 
sentative for  the  purpose  of  escaping  the  tax.    Where  there  is  a 
transfer  of  vested  interest  in  property  the  transferee  must  in- 
clude in  his  return  not  only  such  part  of  income  as  has  been  paid 
to  the  principal  but  the  undistributed  portion  as  well. 

If,  by  reason  of  illness,  absence  or  nonresidence,  a  person  is 
unable  to  render  a  return  in  due  time,  then  the  return  may  be 
made  by  an  agent  having  knowledge  of  the  affairs  Return  by 
of  such  person  whose  return  he  makes.    Such  agent  Agent. 


14  INCOME   TAX — LAW  AND  ACCOUNTING 

is  subject  to  all  penalties  provided  for  erroneous,  false  or  fraudu- 
lent returns. 

When  by  reason  of  minority,  absence,  sickness,  or  other 
disability  the  individual  is  unable  to  make  his  own  return, 
the  same  shall  be  made  by  his  guardian  or  duly  authorized 
agent.  (Art.  17,  Reg.  33.) 

Private  banks,  distributing  their  income  according  to  invest- 
ment of  members  and  exercising  corporate  form  of  organization, 
Returns  of  should  make  returns  in  the  same  form  as  corpora- 
Private  tions.  The  income  received  by  the  members  of 
such  private  bank,  is  not  subject  to  the  normal  tax 
in  the  returns  of  net  income  of  the  member. 

Private  banks  which  have  the  form  of  corporate  or- 
ganizations, elect  officers  and  a  board  of  managers,  have  a 
distinctive  name,  a  fixed  situs,  and  distribute  their  net 
earnings  upon  the  basis  of  the  amount  of  capital  invested 
by  the  members  or  owners,  are  held  to  be  associations 
within  the  meaning  of  the  Federal  income  tax  law,  and  in 
their  organized  capacity  should  make  returns  of  annual  net 
income  and  pay  any  income  tax  thereby  shown  to  be  due. 

The  holders  of  the  stock  or  the  owners  of  the  bank  will  be 
exempt  from  the  normal  tax  to  the  extent  of  the  dividends 
or  earnings  which  they  receive  from  such  private  banks  as 
make  returns  in  their  organized  capacity  and  pay  income 
tax  in  accordance  therewith.  .  .  .  (T.  D.  2137.) 

The  foregoing  is  true,  also,  in  the  case  of  income  from 
private  banks  which  are  recognized  as  associations  for  income 
tax  purposes. 

In  the  case  of  private  banks  which  have  the  form  of 
corporations  and  which  are  held  to  be  associations  within 
the  meaning  of  the  Federal  income  tax  law,  it  is  not  the 
purpose  of  this  office  to  assess  the  income  tax  against  such 
banking  associations  and  then  also  against  the  individual 
members  of  the  association. 

Income  which  the  members  of  the  association  receive 
from  the  bank  because  of  their  investments  therein  will  be 
considered  dividends.  .  .  .  (T.  D.  2152.) 

A  banking  firm  doing  business  as  a  partnership  (not  limited) 
and  which  has  not  a  formal  corporate  organization  or  that  of 


RETURNS   OF  INDIVIDUALS  15 

an  association  is  not  required  to  make  returns  of  net  income 
except  under  the  War  Excess  Profits  Tax.  The  members  of 
the  partnership  will  include  in  their  respective  individual  re- 
turns the  income  received  from  the  partnership. 

A  bank  owned  by  one  person  is  not  construed  to  be  an  asso- 
ciation under  the  income  tax  law  and  is  not  required  to  make 
returns  of  net  income  such  as  are  required  of  corporations  and 
associations.  The  income  of  such  bank  would  be  included  in 
the  return  of  the  individual  owner  together  with  income  from 
all  other  sources  of  such  person. 

The  fact  that  an  American  citizen  resides  abroad  and  pays 
an  income  tax  to  the  country  wherein  he  resides,  does  not  ex- 
cuse him  from  paying  an  income  tax  in  the  United  Citizens 
States.    He  is  required  to  make  a  return  of  all  his  j^jj^ 
income  to  the  Collector  in  the  district  of  his  legal  Must  Make 
residence  or  principal  place  of  business  in  the  United  Return. 
States.    If  a  citizen,  residing  abroad,  has  no  residence  or  place 
of  business  in  the  United  States,  his  return  should  be  made 
to  the  Collector  of  Internal  Revenue,  Baltimore,  Maryland, 
which  is  the  collection  district  of  Washington,  D.  C. 

A  true  and  accurate  return  of  net  income  must  be  filed  with 
the  Collector  of  Internal  Revenue  for  the  district  in  which  the 
person  has  his  legal  residence  or  principal  place  of  TO  Whom 
business,  or  if  there  be  no  legal  residence  or  place  Return  is 
of  business  in  the  United  States,  then  with  the  Col-  Made* 
lector  of  Internal  Revenue,  Baltimore,  Maryland. 

Every  return  is  required  to  be  verified  by  the  oath  Verifica- 
of  the  party  rendering  it.  tion- 

For  the  purpose  of  verification  of  returns  of  income  by 
persons  in  the  Naval  and  Military  service  of  the  United 
States,  any  officer  in  the  Naval  or  Military  Serv-  Verifica- 
ice  of  the  United  States,  within  or  without  the  tion  of 
United  States,  who  is  authorized  to  administer  p|jjj££  £ 
oaths  under  the  provisions  of  Section  4,  Act  of  Naval  or 
July  27,  1892,  27  Stat.  2 7 8, -providing  for  the  ad-  Military 
ministration  of  oaths,  for  the  purpose  of  Military  Service, 
justice  and  administration  or  under  the  provisions  of  Act 
of  March  4,  1917,  Public  391,  page  4,  providing  for  ad- 
ministration of  oaths  for  the  purpose  of  Naval  justice  and 


1 6  INCOME   TAX — LAW  AND  ACCOUNTING 

administration,  is  hereby  empowered  and  authorized  to 
take  the  acknowledgment  of  such  persons  making  returns 
of  income. 

In  all  such  cases  the  certifying  officer  shall  place  under  his 
name  the  official  designation  under  which  he  acts.  (T.  D. 
2534.) 

The  return  for  the  year  ending  December  31,  1917,  must  be 
filed  on  or  before  March  1,1918,  and  the  return  for  each  calendar 
Due  Date  year  thereafter  must  be  filed  on  or  before  March  ist, 
of  Filing.  next  succeeding  such  calendar  year. 

In  case  of  inability,  occasioned  by  sickness  or  business,  to 
file  a  return  in  due  time  (March  i)  application  for  extension  of 
Extension  time  should  be  made  in  writing  to  the  Collector, 
pjjj1 j£|_to  on  or  before  the  day  on  which  the  return  becomes 
turn.  due,  for  an  extension  of  time;  such  extended  time 

cannot  exceed  thirty  days  from  March  ist,  except  that  the 
Commissioner  of  Internal  Revenue  (Washington)  has  authority 
to  grant  a  further  reasonable  extension  of  time,  in  meritorious 
cases,  to  persons  traveling  or  residing  abroad. 

Failure  to  file  returns  may  be  due  to  one  of  two  reasons,  or 
both:  delinquency  or  refusal.  In  case  of  mere  delinquency, 
Penalty  where  there  is  no  wilful  intent  to  violate  the  law, 
£rra5aure  il:  seems  that  the  Collector  may  accept  offers  in 
Return.  compromise  in  lieu  of  specific  penalties  imposed  by 
the  law.  Where,  however,  there  is  a  refusal  or  wilful  intent  to 
violate  the  law,  an  offer  of  compromise  will  not  be  accepted  in 
lieu  of  the  specific  penalty. 

Any  person  that  refuses  or  neglects  to  make  a  return  of  an- 
nual net  income,  who  is  subject  to  a  tax  by  provision  of  law, 
is  liable,  under  the  law,  to  a  penalty  of  not  less  than  $20  nor 
more  than  $1,000. 

In  case  of  failure  to  make  and  file  a  return  within  the  time 
prescribed  by  law  or  by  the  Collector,  the  Commissioner  of 
Internal  Revenue  will  add  to  the  tax  a  penalty  of  50  per  cent, 
of  its  amount  except  that,  when  a  return  is  made  voluntarily 
and  without  notice  from  the  Collector  after  the  due  time  and 
it  is  shown  that  the  failure  to  file  it  was  due  to  a  reasonable 
cause  and  not  to  willful  neglect,  no  such  addition  will  be  made 
to  the  tax. 


RETURNS   OF  INDIVIDUALS  17 

In  case  a  false  or  fraudulent  return  is  made  wilfully,  the 
Commissioner   of   Internal    Revenue   will   add    to  False 
the  tax  a  penalty  of  100  per  cent,  of  the  amount 
thereof. 

The  law  further  declares  that  any  individual  required  there- 
under to  make,  render,  sign  or  verify  any  return  who  makes 
any  false  or  fraudulent  return  or  statement  with  intent  to  de- 
feat or  evade  an  assessment  will  be  guilty  of  a  misdemeanor 
and  subject  to  a  fine  not  exceeding  $2,000  or  imprisonment  for 
a  period  not  exceeding  one  year,  or  both,  in  the  discretion  of 
the  court,  together  with  costs  of  the  prosecution. 

In  cases  of  refusal  or  neglect  to  make  a  return,  or  in  case  of 
an  erroneous,  false,  or  fraudulent  return  having  been  made, 
the   Commissioner  of   Internal   Revenue   has   the  when  In- 
right  to  make  a  return  in  behalf  of  the  party  tax-  ternal 
able  at  any  time  within  three  years  after  said  return  officers6 
is  due  or  has  been  made,  and  the  assessment  made  May  Pre- 
by  the  Commissioner  in  such  case  shall  be  payable  pare  Re- 
by   such    person,    or   persons,    immediately   upon  * 
notification  of  the  amount  of  such  assessment. 

The  Commissioner  of  Internal  Revenue  is  required,  on  or 
before  the  first  day  of  June  of  each  year,  to  notify  all  taxable 
persons  of  the  amount  that  they  have  been  as-  Due  Date 
sessed.    The  tax  becomes  payable  on  the  isth  day  of  of  Payment 
June.    After  ten  days'  notice  by  the  Collector,  there  £e?ayed 
will  be  added  to  the  unpaid  taxes  interest  at  the  Payment 
rate  of  i  per  cent,  per  month  from  the  time  that  of  Tax- 
the  tax  becomes  due  and  an  additional  penalty  of  5  per  cent, 
of  the  amount  of  the  tax. 

Claims  for  refund  of  taxes  after  assessment  has  been  fixed, 
should  be  made  on  Form  46,  to  which  should  be  claims  for 
attached  the  receipt  for  taxes  paid  sought  to  be  Refund  of 
recovered. 

Claims  for  abatement  of  taxes  or  penalties  must  be  made 
on  Form  47.  Each  of  these  claims  must  be  supported  by  the 
affidavit  of  party  aggrieved,  and  by  affidavit  of  the  Collector 
or  Deputy  Collector  of  the  district  hi  which  the  claim  is 
made. 

The  present  income  tax  law  provides  that  claims  for  the  re- 


1 8  INCOME   TAX — LAW  AND  ACCOUNTING 

fund  of  taxes  paid  under  the  Excise  Act  of  August  5,  1909,  and 
Claims  for  the  Income  Tax  Act  of  October  3,  1913,  which  have 
Refund.  been  rejected  by  reason  of  the  statute  of  limitation 
in  existence  prior  to  September  8,  1916,  may  be  reopened,  pro- 
vided that  such  claims  for  refund  involve  a  review  of  the  return 
on  which  the  claim  is  made.  This  question  was  ruled  upon  in 
T.  D.  2396,  dated  November  i,  1916,  containing  a  letter  written 
to  the  Collector  of  Internal  Revenue,  Los  Angeles,  California, 
as  follows: 

"This  office  is  in  receipt  of  your  letter  of  the  26th  ultimo, 
asking  for  a  ruling  as  to  whether,  under  section  14,  para- 
graph A,  of  the  act  of  September  8,  1916,  claims  for  refund 
which  have  once  been  rejected  by  the  commissioner  because 
of  the  statute  of  limitation  in  existence  at  that  time  may  be 
reopened.  The  portion  of  section  14  referred  to  is  in  the 
following  words: 

1(1  Provided,  That  upon  the  examination  of  any  return  of 
income  made  pursuant  to  this  title,  the  act  of  August  5, 
1909,  .  .  .  and  the  act  of  October  3,  1913  ...  if  it  shall 
appear  that  amounts  of  tax  have  been  paid  in  excess  of 
those  properly  due,  the  taxpayer  shall  be  permitted  to 
present  a  claim  for  refund  thereof  notwithstanding  the 
provisions  of  section  3228.' 

"This  office  is  of  the  opinion  that  claims  can  now  be  made 
for  refund  under  that  provision.  Claims  rejected  can  also 
be  reopened  if  the  question  involves  an  examination  of 
the  return.  The  power  does  not  extend  to  other  claims 
whose  adjustment  does  not  necessitate  an  examination  of 
the  return." 

By  amendment  of  the  Act  of  September  8,  1916,  it  is  provided 
that  advance  payments  of  income  and  war  income  taxes  will 
Advance  be  accepted  either  in  whole  of  an  estimated  amount 
Payments*  °^  assessment  or  m  instalments,  in  consideration 
of  Taxes,  of  which,  an  allowance  not  in  excess  of  3  per  cent, 
will  be  credited  on  account  of  taxes  so  paid. 

On  the  instalment  basis  of  payments  not  more  than  four 
payments  will  be  accepted,  each  of  them  at  least  one-fourth 
of  the  estimated  total  tax  and  the  payments  must  be  made  of 
such  amounts,  respectively,  within  thirty  days,  two  months, 
and  four  months  after  the  close  of  the  taxable  year  and  the 


RETURNS  OF  INDIVIDUALS  19 

fourth  payment  on  or  before  the  due  date  of  the  full  payment, 
June  1 5th.  Where  the  return  is  made  for  the  calendar  year 
the  respective  payments  would  become  due  as  follows: 

At  least  %  before  January  31, 
"      "     %       "     February  28, 
"      "    K       "     April  30, 

Balance  on  or  "     June  15. 

Any  amount  overpaid  will  be  refunded  as  a  tax  erroneously 
collected. 

Failure  to  pay  the  instalments  in  due  time  will  work  a  for- 
feiture of  any  benefit  for  advances  made.  All  penalties  under 
existing  law  for  failure  to  make  payments  when  due  are  made 
applicable  to  any  failure  to  pay  the  tax  at  the  time  or  times 
required  under  the  instalment  plan  of  payment. 

Uncertified  cheques  will  be  accepted  in  payment  of  income 
and  excess  profits  taxes  under  regulations  to  be  made  by  the 
Commissioner  of  Internal  Revenue.     If  a  cheque  Forms  of 
should  not  be  paid  by  the  bank  on  which  it  is  drawn  Payment, 
the  person  by  whom  the  cheque  was  tendered  will  be  liable  for 
the  payment,  penalties  and  additions  as  if  the  cheque  had  not 
been  tendered. 

Certificates  of  indebtedness  of  the  United  States  issued  under 
the  Act  of  April  24,  1917,  or  of  any  subsequent  Act  will  be  ac- 
cepted at  par  plus  accrued  interest  in  payment  of  income  and 
excess  profits  taxes. 

By  provision  of  Section  5  of  the  War  Revenue  Bill  of  Oc- 
tober 3,  1917,  the  War  Income  Tax  is  not  applicable  to  Porto 
Rico  and  the  Philippines.    The  Legislatures  of  both  p0rto  Rico 
of  these  possessions  are  given  the  power  to  amend,  Philip- 
alter,  modify  or  repeal  the  income  tax  laws  in  force  Pmes* 
at  these  places  respectively. 

VI.  INCOME  OF  INDIVIDUALS 

Income,  for  the  purpose  of  the  tax,  comprehends  revenue 
and  income  from  all  sources,  as  follows:  gains,  profits,  salaries 
and  wages  received,   including  income  from  pro-  Income 
fessions,    vocations,    business,     trade,    commerce,  Defined. 
sales,  dealings  in  or  use  of  real  and  personal  property,  rents, 
interest,  dividends,  securities,  transactions  of  any  business  for 


20  INCOME   TAX — LAW  AND  ACCOUNTING 

gain  or  profit  and  income  derived  from  any  other  source  what- 
soever, in  whatever  form  paid. 

Although  the  law  provides  that  the  taxable  income  of  an 
individual  shall  include  the  share  to  which  he  would  be  entitled 
Undivided  as  stockholder  or  otherwise  of  the  gains  and  profits, 
c£?ora-°f  if  divided  or  distributed,  whether  divided  or  dis- 
tion.  tributed  or  not,  of  all  corporations,  joint-stock  com- 

panies or  associations,  or  insurance  companies,  yet  it  does  not 
impose  upon  the  stockholder  the  duty  of  ascertaining  his  share 
of  an  undistributed  surplus. 

Where  a  surplus  is  accumulated  beyond  the  reasonable  needs 
of  the  business,  such  unreasonable  accumulation  shall  be  prima 
facie  evidence  of  a  fraudulent  purpose  to  escape  the  tax. 

But  the  fact  that  the  gains  and  profits  are  in  any  case 
permitted  to  accumulate  and  become  surplus  shall  not  be 
construed  as  evidence  of  a  purpose  to  escape  the  said  tax  in 
such  case  unless  the  Secretary  of  the  Treasury  shall  certify 
that  in  his  opinion  such  accumulation  is  unreasonable  for 
the  purposes  of  the  business.  When  requested  by  the  Com- 
missioner of  Internal  Revenue,  or  any  district  collector  of 
internal  revenue,  such  corporation,  joint-stock  company  or 
association,  or  insurance  company  shall  forward  to  him  a 
correct  statement  of  such  gains  and  profits  and  the  names 
and  addresses  of  the  individuals  or  shareholders  who  would 
be  entitled  to  the  same  if  divided  or  distributed.  (Sec- 
tion 3,  Act  of  September  8,  1916.) 

Dividends  received  from  a  life  insurance  company  on  a 
Dividends,  policy  that  has  not  matured  are  not  taxable  as  in- 
^tJ?I  come,  whether  paid  by  cash  or  deducted  from  cur- 

surance 

Policies.       rent  premiums. 

Dividends  received  on  a  paid-up  policy,  however,  should  be 
treated  the  same  as  stock  dividends,  free  from  the  normal  tax 
and  only  taxable  when  the  person  receiving  the  same  has  an 
annual  income  in  excess  of  $5,000,  whereupon  it  is  subject  to 
additional  or  surtaxes  under  the  War  Income  Tax  Law  (Act  of 
October  3,  1917)  and  in  excess  of  $20,000,  when  it  is  subject  to 
surtaxes  under  the  Income  Tax  Law  (Act  of  September  8, 1916). 

The  amount  paid  under  a  life  insurance,  endowment,  or 
annuity  contract  is  not  income  when  returned  to  the  person 
making  the  contract,  either  upon  the  maturity  or  sur- 


INCOME   OF   INDIVIDUALS        .  21 

render  of  the  contract;  but  the  amount  by  which  the 
sum  received  exceeds  the  sum  paid  and  coming  Annuities, 
into  the  hands  of  the  person  making  the  contract  and  pay- 
ment is  income.  (T.  D.  2090  as  amended  by  T.  D.  2152.) 

Proceeds   of   life   insurance   policies   paid    upon  Principal 
the  death  of  the  insured  are  not  taxable  to  the  sm^e 
beneficiary.  Policies. 

Money  received  by  an  injured  person  under  an  accident 
policy  of  insurance  is,   for  income  tax  purposes,  Accident 
deemed  to  be  income.1   Payment  to  a  beneficiary,  Insurance, 
however,  of  the  proceeds  of  an  accident  insurance  policy,  upon 
death  of  the  insured,  is  not  taxable  as  income.     (T.  D.  2135.) 

Amounts  received  from  a  railroad  company  as  reimburse- 
ment for  expenses  occasioned  by  an  accident,  are  Damages, 
not  considered  income  subject  to  tax.    (T.  D.  2135.)  Injuries. 

Amounts  received,  however,  in  compromise  or  settlement  of 
an  action  for  "pain  and  suffering"  is  held  to  be  such  income  as  is 
taxable,  as,  "gains  or  profits  and  income  derived  from  any  source 
whatever."  Amounts  so  received  are  considered  in  their  nature 
similar  to  those  received  by  the  insured  under  a  policy  of  acci- 
dent insurance  by  reason  of  an  accident  sustained.  (T.  D.  2 135.) 

Dividends  are  defined  in  the  Act  of  October  3,  1917,  as  any 
distribution  made  or  ordered  to  be  made  by  a  corporation  out 
of  its  earnings  accrued  since  March  i,  1913,  whether  D.  .^    d 
payable  in  cash  or  stocks.     Under  this  definition 
the  declaration  of  a  dividend  alone  is  sufficient  to  create  an 
obligation  on  the  part  of  the  stockholder  to  include  his  share 
thereof  in  his  return,  but  the  Department  has  consistently  held 
that  dividends  should  be  entered  in  the  annual  return  of  the 
recipient  for  the  year  in  which  such  payments  were  received. 

In  so-called  "close  corporations"  it  is  not  unusual  to  credit 
to  the  account  of  the  respective  stockholders  the  share  of  profits 
to  which  each  is  entitled  without  formal  declaration.  Such 
credit  is  equivalent  to  a  declaration  and  makes  the  stockholder 
accountable  for  the  full  amount  of  such  credit  whether  with- 
drawn or  not. 

Corporations  are  required  to  pay  the  tax  of  2  per  cent,  under 

1  An  amount  received  by  an  employee  in  settlement  of  a  claim  for  in- 
juries sustained,  pursuant  to  accident  compensation  laws  of  a  state,  has  been 
held  to  be  taxable  income. 


22  INCOME    TAX — LAW   AND   ACCOUNTING 

the  Act  of  Sept.  8,  1916,  and  4  per  cent,  by  Act  of  Oct.  3,  1917, 
on  their  entire  net  income  except  as  to  deduction  of  the  War 
Excess  Profits  Tax.  Hence,  a  dividend  received  by  a  stock- 
holder has  already  been  subjected  to  the  normal  tax  rates  and 
the  shareholder  receives  the  same  free  of  such  taxes.  Dividends 
are,  however,  subject  to  the  additional  or  surtaxes  of  both  Acts 
(Sept.  8,  1916,  and  Oct.  3,  1917).  It  follows,  therefore,  that 
where  the  net  income  of  a  stockholder  exceeds  $20,000,  divi- 
dends are  taxable  under  the  Act  of  1916  and  net  income  in  ef- 
cess  of  $5,000  subjects  dividends  to  surtaxes  under  the  Act  of 
1917.  An  income  of  $5,000  or  less,  consisting  wholly  of  dividends, 
is  not  taxable;  but  the  recipient  must  make  a  return  if  such  in- 
come exceeds  the  amount  of  exemption  to  which  he  is  entitled. 

Under  the  Act  of  September  8,  1916,  dividends  paid  out  of 
surplus  accumulated  prior  to  March  i,  1913  (incidence  of  the 
Dividends  individual  income  tax)  were  not  taxable  to  the 
PrTr6?  individual.  In  connection  therewith  the  Internal 
March  1,  Revenue  Department  ruled  that  a  corporation,  to 
1913.  make  such  dividends  free  of  tax  to  the  stockholder 

should  specifically  inform  the  stockholder  that  the  dividends 
were  declared  and  paid  out  of  such  surplus  and  profits  and  re- 
quired that  entry  be  made  upon  the  books  of  the  corporation 
showing  from  what  surplus  the  dividends  were  paid;  without 
such  segregation  and  notice  the  dividends  were  construed  to 
have  been  paid  out  of  current  earnings.  The  stockholder  was 
not  justified  in  omitting  the  dividends  from  his  return  unless 
he  had  received  from  the  paying  corporation  a  statement  specif- 
ically declaring  that  the  dividend,  or  part  thereof,  had  been  paid 
out  of  undivided  profits  accumulated  prior  to  March  i,  1913. 

By  Act  of  October  3,  1917  [Section  31  (b)]  dividends  distrib- 
uted during  the  year  1917  and  thereafter  will  be  deemed  to 
have  been  paid  from  the  most  recently  earned  profits  or  surplus 
and  will  be  taxed  to  the  recipient  at  the  rates  existing  by  law 
for  the  years  in  which  the  profits  or  surplus  were  accumulated. 
But  this  limitation  will  not  apply  to  any  distribution  made 
prior  to  August  6,  1917,  out  of  undivided  earnings  accrued 
prior  to  March  i,  1913.  For  example:  A  dividend  declared  at 
any  time  prior  to  August  6,  1917,  payable  out  of  surplus  profits 
accumulated  prior  to  March  i,  1913,  is  free  of  the  surtax  to  the 


INCOME   OF  INDIVIDUALS  23 

stockholder.  A  dividend  declared  at  any  time  during  the  year 
1917  or  thereafter  (except  that  declared  prior  to  August  6,  1917, 
specifically  out  of  profits  earned  prior  to  March  i,  1913,  ante) 
is  deemed  to  have  been  declared  out  of  the  earnings  of  the  cur- 
rent year.  If  the  earnings  of  the  current  year  were  less  than 
the  amount  of  the  dividend,  then  the  remainder  out  of  the 
earnings  of  the  previous  year,  and  so  on.  Assuming  an  extreme 
case:  A  corporation  on  September  30,  1917,  had  a  surplus  of 
$150,000  accumulated  during  periods,  as  follows: 

Prior  to  March  i,  1913 $50,000.00 

March  i,  1913,  to  December  31,  1915 20,000.00 

January  i,  1916,  to  December  31, 1916 30,000.00 

January  i,  1917,  to  September  30,  1917 50,000.00 

On  September  30,  1917,  the  corporation  declared  a  dividend 
aggregating  $120,000;  then  50,000/1 2o,oooths  or  5/i2ths  of 
such  dividend  is  subject  to  rates  of  taxes  imposed  by  the  Act 
of  October  3,  1917^  3/i2ths  or  i/4th  at  the  rates  prescribed  by 
Act  of  September  8,  1916 ;2  2/12 ths  or  i/6th  at  the  rates  exacted 
under  the  Act  of  March  i,  I9i33;  and  the  remainder  of  2/i2ths 
or  i /6th,  deemed  to  have  been  declared  from  the  surplus  ac- 
cumulated prior  to  March  i,  1913,  bears  no  tax. 

Dividends  declared  payable  in  stock  of  the  declarant  cor- 
poration are  subject  to  the  same  rates  of  taxes  as  are  imposed 
in  the  case  of  cash  dividends,  and  will  be  considered  Stock 
income  to  the  amount  of  earnings  so  distributed  Dividends. 
[Section  31  (a)],  and  not,  as  heretofore,  to  the  amount  of  "cash 
value"  thereof. 

Dividends  declared  payable  in  securities  should  be  stated  in 
the  return  of  the  stockholder  at  the  amount  of  earnings  or 
profits  distributed.     The  amount  of  earnings  dis-  Dividends 
tributed  is  determined  by  the  amount  charged  to  payltS^in 
surplus  account  on  the  books  of  the  declarant  cor-  Securities, 
poration.    For  example,  dividends  declared  payable  in  Anglo- 
French  bonds  at  95,  will  be  returnable  by  the  recipient,  for 

1  Income  and  War  Income  Surtaxes,  page  5. 

2  For  rates  see  page  2. 

3  For  rates  see  Appendix,  page  320. 

4  A  dividend  declared  out  of  capitalized  good  will  is  not  a  distribution  of 
profits  of  the  corporation  and  the  recipient  need  not  report  same  as  income 
until  the  stock  is  sold  by  him;  then,  however,  the  proceeds  of  sale  are  sub- 
ject to  both  normal  and  additional  taxes. 


24  INCOME   TAX — LAW  AND  ACCOUNTING 

income  tax  purposes,  at  the  aggregate  amount  of  such  bonds 
received,  computed  at  $95  on  each  $100  of  the  par  value  thereof. 
Dividends  Under  date  of  April  10,  1917,  the  Department 
ofSRe-  °Ut  issued  a  letter  to  collectors  and  Internal  Revenue 
serves  for  agents  from  which  the  following  are  extracts: 

tion  De-          "The  ' second'  paragraph  under  Sec.  12  of  Title  i 
pletion.         of  the  Act  of  September  8,  1916,  authorizes  corpora- 
tions, joint-stock  companies,  etc.,  in  making  their  returns 
of  annual  net  income,  to  deduct  from  gross  income — 

"'all  losses  actually  sustained  and  charged  off  within  the 
year  .  .  .  including  a  reasonable  allowance  for  the  ex- 
haustion, wear  and  tear  of  property,  arising  out  of  its  use  or 
employment  in  the  business  or  trade' 
"and  in  the  case  of  oil  and  gas  wells  and  mines,  a  reasonable 
allowance  for  depletion  of  natural  deposits. 

"The  essential  requirements  of  this  provision  are  that 
the  amount  deductible  on  account  of  depreciation  and 
depletion  shall  be  charged  off  and  shall  be  reasonable  al- 
lowances— that  is,  an  amount  sufficient  to  make  good  the 
loss  due  to  these  causes.  The  phrase  'charged  off'  con- 
templates that  the  'reasonable  allowance'  deducted  from 
gross  income  on  account  of  depreciation  or  depletion,  shall 
be  credited  to  appropriate  reserve  accounts  and  carried  as  a 
liability  against  the  assets,  to  the  end  that  when  the  total 
of  these  credits  equals  the  capital  investment  account,  no 
further  deductions  on  these  accounts  will  be  allowed. 

"While  the  presumption  is  that  amounts  credited  to  these 
accounts  will  be  used  to  make  good  the  loss  sustained,  either 
through  a  renewal  or  replacement  of  the  property  or  a 
return  of  capital,  there  is  no  requirement  of  law  that  the 
funds  represented  by  these  reserve  liabilities  shall  be  held 
intact  or  remain  idle  against  the  day  when  they  may  be 
used  in  making  good  the  depreciation  of  the  property  with 
respect  to  which  the  deduction  is  claimed,  or  in  restoring 
the  capital  invested  in  the  depleted  assets. 

"The  conversion  of  the  depreciation  reserve  into  tangible 
assets  will  not  constitute  such  a  diversion  as  would  deny 
the  corporation  the  right  of  deduction,  provided  in  all 
cases,  that  the  deduction  claimed  in  the  return  is  a  reason- 
able allowance,  that  is,  a  fair  measure  of  the  loss  due  to 
1  exhaustion,  wear  and  tear  of  property,  growing  out  of  its 
use'  and  is  charged  off  or  so  entered  upon  the  books  as  to 


INCOME   OF  INDIVIDUALS  25 

constitute  a  liability  against  the  assets  with  respect  to  which 
the  depreciation  deduction  is  claimed." 

The  only  principle  upon  which  depreciation  may  be  deducted 
from  income  is  by  reason  of  deterioration  or  wear  and  tear  hav- 
ing occurred  in  the  property  depreciated.  Such  having  taken 
place  the  property  must  be  assumed  to  have  decreased  in  value, 
and  to  record  that  reduction  in  value  an  offset  to  the  property 
account  is  shown  by  a  reserve  for  such  reduction,  namely,  a 
reserve  account.  Hence,  the  reserve,  appearing  upon  the  credit 
side  of  a  double  entry  ledger,  is  not  offset  by  any  property  among 
the  assets  except  the  particular  property  which  it  qualifies,  and, 
as  to  that,  it  is  a  modification  of  the  book  value. 

The  concession  that  "The  conversion  of  the  depreciation 
reserve  into  tangible  assets  will  not  constitute  such  a  diversion 
as  would  deny  the  corporation  the  right  of  deduction,  pro- 
vided ..."  the  deduction  is  fair,  must  be  predicated  upon 
an  understanding  that  the  reserve  exists  apart  from  the  account 
that  it  qualifies.  Such  so-called  reserve  merely  "negatives" 
the  property  account  to  which  it  relates  and  any  different  ac- 
ceptance of  it  will  lead  to  a  misapplication  of  the  reserve.  A 
reserve  which  exists  merely  as  a  modification  of  a  property 
account,  and,  in  effect,  is  a  reduction  of  the  book  value  thereof, 
is  not  such  an  entity  as  is  convertible  "into  tangible  assets" 
but  merely  indicates  a  reduced  value  of  property  already  a 
part  of  the  corporation's  assets.  If  it  were  otherwise,  the  cor- 
poration could  purchase  stocks,  bonds  or  anything  else,  charge 
the  cost  thereof  to  the  reserve  for  depreciation  and  thereby 
reduce  the  reserve,  and,  at  the  same  time,  create  a  fund  that 
would  not  appear  upon  the  books  of  account.  Without  question 
such  use  of  a  so-called  reserve  for  depreciation  would  be  an 
evasion  of  law  and  a  distortion  of  facts. 

On  October  10,  1917,  the  Department  issued  T.  D.  2540,  in 
the  form  of  a  letter  to  collectors  of  Internal  Revenue  to  the 
effect  that  dividends  paid  out  of  reserves  for  depreciation  are 
taxable  as  income  to  the  stockholder  and  are  not  a  return  of 
principal,  as  follows: 

"To  Collectors  of  Internal  Revenue: 
"Referring  to  the  practice  of  certain  corporations  of 
declaring  dividends  out  of  reserves  set  aside  to  meet  de- 


26  INCOME   TAX— LAW  AND  ACCOUNTING 

preciation  and  depletion  of  property,  and  of  advising  stock- 
holders that  such  dividends  represent  a  distribution  of 
capital  assets,  your  attention  is  directed  to  the  ruling  made 
herein  as  follows: 

"All  such  dividends  received  by  stockholders  declared 
out  of  such  reserves  accumulated  subsequent  to  March  i, 
1913,  constitute  income  to  the  stockholder  under  the  Act 
of  September  8,  1916,  and  most  be  accounted  for  in  returns 
of  net  income. 

"A  stockholder's  investment  is  in  the  stock  of  a  corpora- 
tion. If  he  disposes  of  his  stock  for  more  than  its  fair 
market  value  on  March  i,  1913,  or  its  cost  if  acquired  since 
that  date,  the  profit  realized  must  be  returned  as  income; 
if  he  disposes  of  it  at  a  loss,  the  loss  sustained  is  deductible 
from  gross  income  within  the  limits  of  the  taxing  act.  In 
computing  the  profit  or  loss  sustained  there  must  be  taken 
into  account  dividends  paid  from  reserves  accumulated 
prior  to  March  i,  1913,  which  were  not  returned  as  income 
for  the  year  in  which  received,  under  the  provisions  of  the 
Act  of  September  8,  1916. 

"  All  rulings  in  conflict  herewith  are  hereby  revoked. 

"  DANIEL  C.  ROPER, 
"Commissioner  of  Internal  Revenue" 

A  reserve  for  depreciation  should  not  be  used  for  any  purpose 
except  as  an  offset  to  the  property  account  that  it  qualifies  or 
for  charges  of  renewals  and  replacements.  If  an  investment 
fund  is  created  for  purposes  of  renewals  the  amount  set  aside 
or  reinvested  is  merely  a  conversion  of  one  form  of  asset  into 
another  and  bears  no  relation  to  the  reserve  account  except  to 
furnish  available  means  with  which  to  make  replacements. 
There  can  be  no  objection  to  paying  a  dividend  with  the  in- 
vested fund,  but  a  dividend  cannot  be  declared  out  of  a  reserve 
for  depreciation  because  the  so-called  reserve  is  not  surplus 
of  the  corporation. 

Where  stock  of  the  same  company  is  frequently  bought 
Purchases  and  sold  and  the  cost  of  the  particular  stock  sold 

aJ^,,SaJes,  is  not   ascertainable,   the   cost   should   be   deter- 

of  Stock  of      .     , ,     . .  £ ' ,    ,  ~  , 

Same  mined  by  the  cost  of  that  first  purchased  remaining 

Issue.  unsold. 

"This  office  acknowledges  the  receipt  of  a  copy  of  a  letter 


INCOME   OF  INDIVIDUALS  27 

received  by  you  under  date  of  February  8,  1916,  wherein 
your  correspondent  requests  to  be  advised  how  the  amount 
of  profit  to  be  returned  for  Federal  Income  Tax  purposes 
should  be  computed  in  cases  where  various  parcels  of  stock 
of  the  same  issue  are  bought  and  sold  at  different  dates. 
In  reply  you  are  advised  that  the  office  holds  that  whenever 
possible,  the  shares  sold  shall  be  identified  by  the  number 
of  the  certificates  covering  them.  When  stock  is  sold,  and 
its  identity  cannot  be  determined,  it  should  be  charged 
against  the  stock  first  purchased  and  remaining  unsold. 
If  the  purchase  occurred  on  or  after  March  i,  1913,  the 
entire  amount  of  difference  should  be  returned."  (Letter 
to  the  Corporation  Trust  Company,  signed  by  Commis- 
sioner W.  H.  Osborn,  and  dated  February  26,  1916.) 

Where  a  corporation  is  formed  for  the  purpose  of  taking  over 
the  assets  of  an  existing  corporation  which  issues  to  the  stock- 
holders of  the  old  company  capital  stock  (of  the  Exchange 
new  company)  in  exchange  for  the  old  at  the  same  of  Stock, 
par  value,  no  income  accrues  to  the  old  corporation  notwith- 
standing that  the  actual  value  of  the  stock  of  the  old  company 
is  admittedly  worth  at  least  double  the  par  value;  no  taxable 
income  accrues  to  the  stockholders  until  they  sell  their  holdings 
in  the  new  company. 

"This  office  is  in  receipt  of  your  letter  of  the  yth  instant, 
in  which  you  submit  certain  inquiries  with  respect  to  the 
following  proposition: 

"A  domestic  corporation  having  an  authorized  capital 
stock  of  $750,000,  in  1910,  acquired  certain  properties 
representing  an  investment  of  its  entire  issued  capital  stock 
of  $525,000.  This  is  the  present  total  issue  of  the  Company. 

"It  is  now  proposed,  for  certain  internal  and  other  rea- 
sons, to  incorporate  a  new  company  with  an  authorized 
capital  stock  of  $750,000,  being  the  same  capital  stock  as  the 
first  company.  The  new  company  to  take  over  the  real 
property  of  the  first  company  and  issue  in  exchange  for  such 
real  properties  $525,000  of  the  capital  stock  of  the  second 
company. 

"The  capital  stock  of  the  second  company  thus  issued 
would  be  distributed  among  the  stockholders  of  the  first 
company,  through  the  medium  of  Trustees  or  otherwise, 
share  for  share,  in  exchange  for  their  holdings  in  the  first 


28  INCOME  TAX — LAW  AND  ACCOUNTING 

company,  which  would  then  be  surrendered.  This  would 
leave  the  stockholders  of  the  first  company  with  a  share  of 
stock  in  the  second  company  for  every  share  they  held  in  the 
first  company. 

"The  first  company,  after  this  transfer  had  been  com- 
pleted, would  be  dissolved. 

"Since  the  incorporation  of  the  first  company,  in  1910, 
however,  the  real  property  owned  by  it,  has  shown  con- 
siderable increase  in  value  and  the  shares  of  the  first  com- 
pany are  now  worth  at  least  double  par. 


"In  reply  to  your  several  inquiries,  you  are  informed  that 
the  shares  of  stock  authorized  and  issued,  being  the  same  as 
to  both  corporations,  and  there  appearing  to  be  no  con- 
sideration to  the  first  company  for  its  assets,  other  than  the 
$525,000  par  value  of  the  second  company's  stock,  an  amount 
exactly  equal  to  the  par  value  of  the  first  company's  stock 
out-standing,  no  profit  taxable,  under  the  income  tax  law 
would  accrue  to  the  first  company  as  the  result  of  this  trans- 
action, it  being  understood  that  the  stock  of  the  second  com- 
pany would  be  distributed  upon  even  terms  to  the  stock- 
holders of  the  first  company  in  exchange  for  the  stock  of  such 
first  company  held  by  them,  which  stock  so  taken  up  would 
be  cancelled.  The  exchange  of  stock,  that  is  the  issuance  of 
stock  by  the  second  corporation  for  the  stock  of  the  first 
corporation,  share  for  share,  of  like  par  value,  would  not 
constitute  a  stock  dividend,  and  an  exchange  on  the  basis 
indicated  would  not  result  in  any  taxable  income  to  the 
stockholder  of  the  first  company  receiving  in  exchange  for 
their  former  holdings  the  stock  of  the  second  company. 
The  stock,  both  authorized  and  issued,  being  in  both  cases 
of  like  par  value  and  being  predicated  upon  exactly  the 
same  assets,  the  transaction  constitutes  a  deal  by  which  the 
second  company  takes  over  the  assets  of  the  first  company, 
giving  therefor  its  stock  of  a  par  value  exactly  equal  to  the 
par  value  of  the  stock  of  the  first  company  outstanding, 
thus  placing  in  the  hands  of  the  stockholders  the  same 
number  of  shares  of  the  second  company  and  same  par 
value  as  that  which  they  theretofore  held  in  the  first  com- 
pany, the  stock  in  both  cases  being  supported  by  the  same 
assets.  Hence  the  transaction  resulted  in  no  gains,  profits 


INCOME  OF  INDIVIDUALS  29 

or  income  to  either  the  first  corporation  or  its  stockholders. 
If,  as  you  say,  the  stock  of  the  first  company  at  the  time  of 
this  transaction,  was  worth  '  double  par,'  the  stock  of  the 
second  company  being  supported  by  identically  the  same 
assets,  is  presumably  of  the  same  value  and  the  exchange 
of  the  new  stock  for  the  old,  results  in  no  income  subject  to 
tax.  It  is  simply  an  exchange  of  assets  of  like  character  and 
like  value. 

II 

"It  may  be  stated,  however,  that  if  the  stockholders  in 
the  new  company  shall  hereafter  sell  their  stock,  they  will 
be  required  to  account  for  as  taxable  income,  any  amount 
which  they  may  receive  for  the  same  in  excess  of  the  cost 
to  them  of  the  stock  of  the  first  company,  if  such  stock  was 
acquired  subsequent  to  March  i,  1913,  or  any  amount  which 
they  may  receive  in  excess  of  the  fair  market  value  or  price 
of  the  stock  of  the  first  company  if  same  was  acquired  prior 
to  March  i,  1913.  In  other  words,  the  cost  to  the  stock- 
holders of  the  old  company's  stock  or  its  fair  market  price 
or  value  as  of  March  i,  1913,  as  the  case  may  be,  will  be 
the  basis  for  computing  any  gains  or  losses  to  the  stock- 
holders that  may  result  from  the  sale  of  their  present  hold- 
ings of  the  new  company's  stock."  (Letter  to  the  Corpora- 
tion Trust  Company,  signed  by  Acting  Commissioner 
David  A.  Gates,  and  dated  March  8,  1917.) 

The  exchange  of  capital  stock  of  a  corporation  for  the  capital 
stock  of  another  corporation,  where  one  is  formed  for  the  pur- 
pose of  taking  over  the  other,  resulting  in  an  in-  Additional 
creased  capitalization  and  yielding   to  the  stock-  Stock  Re- 
holders  of  the  reorganized  company  a  larger  amount  ^eived  m 
of  stock  at  the  par  value,  renders  such  increase  ganization 
taxable  as  income,  both  to  the  selling  corporation  Deemed 
and  the  recipient  shareholders.  Income. 

"The  present  holding  of  this  office  is  that  in  all  cases 
wherein  a  corporation  sells  and  transfers  its  assets  to  an- 
other corporation,  the  amount  received  by  the  selling  cor- 
poration in  excess  of  the  cost  of  the  property  sold  will  be 
considered  income  to  such  selling  corporation,  and,  for  the 
purpose  of  the  tax,  may  be  prorated  over  the  number  of 


30  INCOME   TAX — LAW  AND  ACCOUNTING 

years  the  property  was  held  prior  to  the  date  of  its  sale,  and 
the  amount  to  be  returned  for  the  year  in  which  the  sale  was 
made  for  the  purpose  of  the  tax  is  the  amount  apportioned 
to  the  years  subsequent  to  January  i,  1909. 

"If  the  shares  of  stock  received  by  the  selling  corpora- 
tion are  distributed  by  it  to  its  stockholders,  the  amount 
so  distributed  in  excess  of  the  stock  held  by  them  in  the 
original  corporation  will  be  considered  income  to  such  stock- 
holders and,  for  the  purpose  of  the  supertax,  should  be 
returned  by  them  when  the  net  income  (inclusive  of  such 
dividends)  of  such  individuals,  for  any  one  year,  is  in  excess 
of  $20,000.  (After  January  i,  1917,  also  subject  to  the 
War  Income  Tax — in  excess  of  $5,000.) 

"The  selling  corporation  being  taxable  on  the  excess 
of  the  stock  received  over  the  cost  of  the  assets  sold,  the 
individuals  receiving  the  excess  in  the  form  of  stock  of  the 
purchasing  company  will  not  be  required  to  return  their 
respective  shares  of  such  excess  for  the  purpose  of  the  nor- 
mal tax."  (Extract  from  letter  to  A.  C.  Kahn,  New  York, 
N.  Y.,  signed  by  Commissioner  W.  H.  Osborn,  and  dated 
September  9,  1916.) 

Sale  of  Sales  of  "rights"  to  subscribe  to  capital  stock, 

Stock  accruing  to  stockholders  in  the  case  of  new  issues, 

Rights.         are  deemeci  t0  De  income. 

"The  income  tax  law  levies  the  tax  upon  income  accruing 
from  all  sources  and  under  these  circumstances,  it  is  held 
by  this  office  that  income  accruing  to  an  individual  who 
holds  stock  in  a  corporation  by  reason  of  the  sale  of  his 
rights  to  subscribe  to  new  stock  in  the  corporation  is  such 
an  item  of  income  as  should  be  included  in  his  return  of 
annual  net  income  for  the  assessment  of  the  tax."  (Extract 
from  a  letter  signed  by  Deputy  Commissioner  L.  F.  Speer 
and  dated  February  27,  1915.) 

Dividends  received  in  the  form  of  scrip  should  be  reported 
as  income  at  the  face  value  thereof.  In  the  event  that  the  same 
Scrip  is  not  paid  upon  maturity,  or  should  in  the  meantime 

Dividends,  become  worthless,  it  may  be  deducted  from  the  return 
of  the  year  in  which  it  turns  out  to  be  uncollectible. 

Dividends  received  from  foreign  corporations,  not  subject 


INCOME   OF  INDIVIDUALS  31 

to  the  income  tax  in  the  United  States,  are  not  free  from  normal 
taxes  and  may  not  be  deducted  as  such  in  the  return  Dividends 
of  the  recipient.    If,  however,  the  business  of  such  Received 
foreign  corporation  is  confined  to  the  United  States  j^J™ 
and  it  pays  income  taxes  on  its  net  income  the  Corpora- 
dividends  paid  by  it  should  be  treated  the  same  as  tion' 
dividends  paid  by  a  domestic  corporation. 

Dividends  declared  and  paid  by  a  foreign  corporation 
which  derives  its  entire  income  from  business  done  wholly 
within  the  United  States  and  pays,  under  the  provisions  of 
the  Federal  Income  Tax  Law,  a  tax  upon  its  net  income, 
should  be  treated  in  the  same  manner  as  dividends  from 
domestic  corporations.  (T.  D.  2090.) 

Dividends  may  only  be  declared  out  of  profits  and  surplus 
earnings  except  where  the  corporation  is  being  dissolved  or 
liquidated,  in  which  case  the  olividend  is  a  return  Return  of 
of  capital  to  the  stockholder.     Dividends  issued  by  Capital  not 
a  liquidated  corporation  up  to  the  amount  of  cost  Income' 
of  the  stock  to  the  shareholder  is  not  taxable  under  the  income 
tax;  any  amount  in  excess  of  the  cost  thereof,  however,  is  in- 
come and,  hence,  is  taxable. 

Limited  partnerships,  for  the  purpose  of  income  taxation, 
are  treated  as  corporations.     Hence,  income   distributed  by 
such  partnerships  to  their  members,  of  which  the  Profits  of 
partnership  has  made  return  on   the  same  form  p^Jngr- 
(blank)  as  required  of  corporations,  is  free  of  normal  ships, 
taxes  to  the  recipient. 

The  profits  of  limited  partnerships  making  returns  in  the 
same  manner  as  corporations  make  returns  will  be  treated 
the  same  as  dividends  of  corporations  and  will  be  returned 
in  the  returns  of  individuals  in  the  same  manner  as  are 
dividends  upon  the  stock  of  corporations;  that  is  to  say, 
the  dividends  received  from  such  limited  partnerships  will 
not  be  subject  to  the  normal  tax  in  the  hands  of  the  members 
of  the  partnership  receiving  the  same.  (T.  D.  2137.) 

Salaries  are  not  required  to  be  reported  as  in-  wJ^Re. 
come  until  actually  received.  tumable. 

"An  amount  of  salary  which  was  earned  during  the  year 


32  INCOME   TAX — LAW  AND  ACCOUNTING 

1914  (1915)  and  was  not  received  until  some  date  subse- 
quent to  December  3ist  of  that  year,  need  not  be  returned 
as  income  for  the  year  in  which  earned,  but  should  be  re- 
turned for  the  year  in  which  received  if  the  person  receiving 
the  same  is  a  taxable  person  required  to  render  a  return." 
(Extract  from  letter  to  Gary,  Piper  and  Hall,  signed  by  L.  F. 
Speer  and  dated  March  i,  1915.) 

In  the  absence  of  a  ruling  under  the  amended  law,  it  seems 
plausible  that  a  salary  paid  in  the  capital  stock  of  a  corpora- 
Salary  tion  is  taxable  to  the  recipient  at  the  amount  of 
Paid  by  salary  received  and  not  at  the  "cash  value"  of  the 
Stock.  stock,  as  heretofore.  If  the  stock  so  issued,  is  of 
the  original  issue  of  the  corporation,  it  must  be  paid  for  at  par 
and  so  reported  by  the  recipient.  Should  the  stock  be  issued 
from  so-called  "treasury  stock"  (fully  paid  on  the  records  of 
the  corporation)  at  a  price  less  than  the  par  value,  it  would 
seem  reasonable  that  the  recipient  should  report  as  income  the 
amount  of  salary  of  which  the  stock  was  payment.  When  he 
disposes  of  the  stock  the  amount  realized  in  excess  of  the  amount 
of  salary  reported  will  be  income  for  the  year  in  which  the 
stock  was  sold. 

Salaries  Salaries  received  by  employees  of  organizations 

Received  exempt  under  the  income  tax  law  are  subject  to  the 
empt  Cor-  tax  and  should  be  reported  in  the  return  of  the 
porations.  employee.  (T.  D.  2090.) 

Living  When  an  individual  is  furnished  living  quarters 

Par^f fS  *n  Edition  to  salarv  > tne  rental  value  of  such  living 
Compen-  quarters  is  regarded  as  compensation  subject  to  the 
sation.  income  tax.  (T.  D.  2090.) 

Board,  lodging  or  other  consideration  received  in  lieu  of 
rental  is  considered  income  equal  in  amount  to  the  in- 
Board,  debtedness  in  payment  of  which  it  is  received,  and 
Lodging,  should  be  included  in  any  return  of  annual  net  income 
Lieu  of  its  recipient  is  required  to  render  under  the  provisions 
Cash.  of  the  income  tax  law.  (T.  D.  2135.) 

Bonuses  received  from  employers  in  the  nature  of  addi- 
_  tional  compensation,  and  not  as  gratuities,  are 

taxable  as  income  of  the  recipient.    (See  page  108.) 


INCOME   OF  INDIVIDUALS  33 

Commissions  paid  to  salesmen  are  deductible  ex-  Salesmen's 
penses  of  the  payer  and  should  be  reported  as  in-  c.ommis" 
come  in  the  return  of  the  recipient.    (T.  D.  2090.) 

Fees  for  professional  services  need  not  be  re-  When  Pro- 
turned  as  income  until  received.    Promissory  notes,  /g^are 
however,  received  in  payment  of  such  fees  shall  be  Returnable, 
deemed  to  be  income  received. 

"This  office  holds  that  money  due  for  professional  serv- 
ices of  lawyers,  physicians  and  the  like  should  be  entered  on 
the  annual  return  for  the  year  in  which  such  payments  were 
received."  (Extract  from  letter  to  Beekman,  Menken  and 
Griscom,  signed  by  Commissioner  W.  H.  Osborn  and 
Dated  February  18,  1915.) 

Fees  received  by  clergymen,  in  addition  to  salary  compen- 
sation, for  any  form  of  service,  are  construed  to  ni 

,  ,    .      J  Clergymen, 

be  taxable  income. 

Easter  offerings,  and  fees  received  by  clergymen  for 
funerals,  masses,  marriages,  baptisms,  etc.,  are  considered 
income  subject  to  tax  under  the  provisions  of  the  income 
tax  law  of  October  3,  1913.  Christmas  gifts,  however,  are 
not  considered  income  within  the  meaning  of  the  law  and 
should  not  be  included  in  a  return.  (T.  D.  2090.) 

Compensation  received  by  a  trustee  covering  a  period  of 
years  and  not  paid  or  reported  as  income  until  maturity  of 
trust,  has  been  held  to  be  returnable  in  the  year  Compensa- 
received   and   deductions   therefrom   may   not   be  tion  of 
prorated  over  the  years  of  the  trusteeship.    Only  Trustee- 
deductions  applicable  to  the  year  income  is  returned  are  al- 
lowable.   (T.  D.  2135.) 

Profit  on  the  sale  of  capital  assets  is  returnable  as  income. 
The  profit  on  sales  of  capital  assets  acquired  prior  to  March  i, 
1913,  is  the  excess  of  the  selling  price  over  the  fair  Profit  on 
market  price  or  value  of  such  property  as  of  March  i,  capital 
1913.    In  the  case  of  property  acquired  since  that  Assets, 
date  the  profit  is  the  selling  price  in  excess  of  the  cost.    If  the 
capital  asset  is  one  on  which  depreciation  has  been  charged  off, 
such  depreciation  should  be  taken  into  consideration  in  deter- 
mining the  profit  or  loss.    For  example,  a  machine  purchased 
on  January  i,  1914,  for  $1,000  on  which  depreciation  had  been 


34  INCOME   TAX — LAW  AND  ACCOUNTING 

charged  off  at  the  rate  of  10  per  cent,  per  annum  for  years  1914 
and  1915,  and  which  was  sold  on  January  i,  1916,  for  $850, 
would  show  a  profit  of  $50,  derived  as  follows: 

Selling  price $850.00 

Cost $1,000 .  oo 

Less  depreciation  charged  off,  20%  (2  years  @  10%)          200 .  oo 

Cost,  less  depreciation 800.00 

Profit $  50 .  oo 

The  law  makes  no  mention  of  depreciation  charged  off  prior 
to  the  time  of  sale,  nor  has  there  been  any  ruling  on  the  ques- 
tion. From  an  accounting  point  of  view,  however,  there  is 
only  one  logical  conclusion  in  the  matter  of  ascertaining  the 
profit  or  loss  and  that  is  to  deduct  whatever  depreciation  had 
previously  been  charged  off.  If  repairs  had  been  charged  against 
the  reserve  for  depreciation  then  the  cost  of  such  repairs  would 
be  a  reduction  of  the  depreciation  deducted  from  the  cost  of 
the  machine  in  determining  amount  of  profit  on  the  sale.  As- 
suming in  the  above  example  that  repairs  and  renewals  costing 
$25  had  been  charged  to  the  reserve  for  depreciation,  the  re- 
sult would  be  as  follows: 

Selling  price $850. oo 

Cost $1,000.00 

Deduct: 

Depreciation  charged  off,  (20%) $200.00 

Less,  repairs  charged  to  depreciation ....         25 .  oo 

175-00 

Cost,  less  unused  depreciation 825 .00 


The  date  of  the  adoption  of  the  income  tax  amendment  to 
the  Constitution  was  March  i,  1913.  In  order  that  taxpayers 
Computing  should  not  pay  a  tax  upon  accrued  profits  on,  or 
Losson*  enhanced  values  of  property,  which  had  theretofore 
Property  been  acquired,  and,  also,  for  the  purpose  of  pre- 
Acquired  venting  the  deduction  of  losses  that  had  been  sus- 
March°l  tained  on  property  then  held,  the  law  provides 
1913.  that  for  the  purpose  of  ascertaining  the  profit  or 

loss  on  property  acquired  prior  to  March  i,  1913,  such  property 


INCOME   OF   INDIVIDUALS  35 

shall  be  valued  at  the  market  price  or  value  on  March  i, 


In  determining  the  fair  market  price  or  value  for  the  purpose 
of  ascertaining  the  profit  or  loss  on  the  sale  of  stock  or  bonds 
acquired  prior  to  March  i,  1913,  where  such  stocks  Fair  Mar- 
or  bonds  are  dealt  in  on  the  exchange,  it  has  been  orValu^of 
stated  by  the  Commissioner  of  Internal  Revenue  Securities. 
in  a  letter  to  the  Corporation  Trust  Co.,  dated  November  21, 
1916,  that  such  fair  market  price  would  be  the  average  price 
at  which  such  securities  sold  on  March  i,  1913,  and  not  the 
price  at  which  they  sold  at  any  particular  time  of  the  day. 
The  acceptability  of  market  quotations  is,  nevertheless,  con- 
ditioned upon  the  same  being  the  "fair  market  price  or  value." 
The  price  or  value  of  property  should  be  determined  upon  all 
the  relevant  facts  governing  the  particular  case. 

Application  of  the  prescribed  method  of  computing  the  profit 
or  loss  on  property  acquired  prior  to  March  i,  1913,  sometimes 
produces  a  most  unreasonable  and  unsound  result,  profit  or 
For  example,  stock  was  purchased  in  1912,  at  par  Loss  Se- 
value,  $100  per  share;  on  March  i,  1913,  the  market  ^J^red 
value  thereof  was  $60  per  share;  and  in  1916  the  Pn0r  to 
stock  was  sold  at  $95  per  share.     An  income  tax  March  1, 
return  for  the  year   1916,   reflecting   these  facts, 
would  show  a  profit  of  the  difference  between  the  market  price 
on  March  i,  1913,  $60,  and  the  selling  price,  $95,  namely,  $35 
per  share.    This  phantom  profit  never  existed  except  for  in- 
come tax  purposes.    There  was  actually  a  sustained  loss  of  $5 
per  share.    Applying  the  same  state  of  facts  to  a  fiduciary  or 
trustee,  who,  in  1916  was  accounting  in  Court  to  the  benefi- 
ciaries, such  trustee,  would,  in  his  accounts  submitted  to  Court, 
show  a  loss  of  $5  per  share,  and  at  the  same  time  would  show 
by  such  account  an  expenditure  for  income  taxes  on  a  profit  of 
$35  per  share  of  stock  that  was  actually  sold  at  a  loss.    The 
fallacy  of  the  method  in  the  circumstances  described,  is  so  ap- 
parent that  no  Court  could  reasonably  enforce  it.    It  is  sug- 
gested, when  a  situation  arises,  such  as  the  one  pointed  out, 
that  all  the  facts  of  the  particular  case  be  placed  before  the 
Commissioner  of  Internal  Revenue  with  a  request  for  a  special 
ruling  thereon. 


36  INCOME   TAX — LAW  AND  ACCOUNTING 

Profit,  for  income  tax  purposes,  has  been  defined  as  the  dif- 
Profit  ference  between  the  selling  price  and  the  cost,  where 

Defined.       the  selling  price  is  more  than  the  cost.    (T.  D.  2090.) 
Sales  of  The  rulings  as  to  what  constitutes  returnable 

Real  profit  on  sales  of  real  estate  by  corporations  are  also 

Estate.         applicable  to  individuals.    (See  page  94.) 

The  cost  of  property  acquired  subsequent  to  the  incidence 

of  the  tax  (March  i,  1913),  will  be  the  actual  price  paid  for 

Cost  of         it,  together  with  the  expense  incident  to  the  procure- 

Property.      ment  of  the  property  in  the  first  instance  and  its  sale 

thereafter,  and  the  cost  of  improvement  or  development  if 

any.    (T.  D.  2005.) 

An  increase  in  the  book  value  of  assets  to  conform  with  ap- 
Apprecia-  praisal  values,  or  for  other  purposes,  does  not  render 
tion  not  such  increase  taxable  as  income.  (See  also  "In- 
Income.  vestments,  stock  and  bonds,"  page  187.) 

The  following  is  an  extract  from  a  letter  to  Collectors  of  In- 
ternal Revenue,  dated  August  14, 1914. 

Returnable  and  taxable  income  is  that  actually  realized 
during  the  year,  that  is,  that  which  is  evidenced  by  the 
receipt  of  cash  or  its  equivalent.  Until  any  appreciation 
taken  up  on  the  books  has  been  so  realized,  it  will  not  be 
required  to  be  returned  as  income.  Hence,  in  the  prepara- 
tion of  returns  and  in  the  examination  of  books  for  the 
purpose  of  verifying  the  same,  mere  book  entries  of  apprecia- 
tion in  the  value  of  capital  assets  will  be  disregarded. 

It  should  be  understood,  however,  that  in  the  event  of 
the  sale  of  the  assets,  the  increase  in  whose  value  has  been 
taken  up  on  the  books,  the  profit  or  income  to  be  returned 
as  a  result  of  the  sale  will  be  determined  upon  the  basis  of 
the  difference  between  the  cost  and  the  selling  price  of  the 
assets;  that  is  to  say,  in  the  case  of  a  sale,  book  values  will 
be  ignored  save  and  except  as  such  book  values  represent 
the  actual  cost  of  the  properties. 

Where  income  is  computed  on  the  basis  of  actual  receipts 
and  disbursements,  a  promissory  note  is  deemed  payment  of 
Promissory  an  account  and  is  returnable  as  income.  In  the 
Notes.  event  that  such  note  is  not  paid,  it  is  deductible 
as  a  loss  when  actually  ascertained  to  be  worthless. 


INCOME   OF  INDIVIDUALS  37 

Property  acquired  by  gift  is  not  taxable,  but  the  income 
accruing  therefrom  after  receipt  of  such  gift  is  income  and 
subject  to  the  tax.    Property  acquired  by  gift  and  Property 
thereafter  sold  at  an  advance  of  the  value  when  j,y(GJff 
gift  was  received,  yields  a  profit  of  the  difference  Legacies, 
between  the  selling  price  and  such  value,  that  is  taxable  as 
income.    If  such  property  was  acquired  prior  to  March  i,  1913, 
then  the  profit  will  be  the  difference  between  the  selling  price 
and  the  fair  market  value  as  at  March  i,  1913. 

"Income  received  by  estates  of  deceased  persons  during  the 
period  of  administration  or  settlement  of  the  estate,  shall  be 
subject  to  the  normal  and  additional  tax  and  taxed  income 
to  their  estates."  This  is  true  also  of  income  from  Received 
any  kind  of  property  held  in  trust,  including  that  b?  Estates, 
on  accumulated  income  held  in  trust  for  the  benefit  of  "  unborn 
or  unascertained  persons,  or  persons  with  contingent  interests 
and  income  held  for  future  distribution  under  the  terms  of  the 
will  or  trust."  In  such  cases,  except  where  the  beneficiary 
makes  the  return,  the  executor,  administrator  or  trustee  shall 
make  a  return  and  be  assessed  on  such  income,  less  the  exemp- 
tion allowed  to  the  estate  during  administration. 

Where  the  beneficiaries  receive  the  incomes  from  an  es- 
tate, the  respective  shares  to  be  distributed  shall  income  to 
be   the   amounts   returnable   and   subject   to   the  Heirs  and 
tax.  Legatees. 

The  general  policy  of  the  law  and  rule  of  interpretation 
require  that  legacies  in  all  cases,  unless  clearly  inconsistent 
with  the  intention  of  the  testator,  should  be  held  Legacies, 
to  be  vested  rather  than  contingent.  Where  there  Vested 
is  a  vested  interest  the  income  from  such  interest,  Interest, 
whether  distributed  or  not,  is  subject  to  the  tax;  and  when 
in  the  hands  of  fiduciaries  they  are  required  to  account  for 
and  pay  the  tax  thereon.    (T.  D.  2090.) 

In  a  case  where  a  beneficiary  sells  securities  at  a  price  in 
excess  of  that  at  which  such  securities  were  appraised  at  the 
time  of   settlement  of  the  estate,   the  increment  p^et 
constitutes  a  profit  which  is  returnable  as  income  Returnable 
by  the  beneficiary.  byLegatee. 

It  has  been  ruled  in  a  case  where  it  was  impracticable  for  the 


38  INCOME  TAX — LAW  AND  ACCOUNTING 

executors  to  determine  the  net  income  and  distributive  share 
Trust  Es-  of  the  beneficiaries  of  a  trust  estate  for  over  three 

^v  ^n?is~  years  after  the  death  of  the  testator  that  the  execu- 

tnbuted        »  .      _.  , 

for  Period    tors  may  make  fiduciary  returns  for  the  years  1913 

of  Years.  to  1916,  inclusive  (if  the  interest  of  the  beneficiary 
requires  return  to  be  made),  and  need  not  include  the  total 
amount  in  a  return  for  the  year  1916.  Amended  returns  of  the 
beneficiaries  would  be  required  if  the  distributive  shares,  added 
to  income  already  returned  in  the  years  affected,  would  be 
subject  to  the  additional  or  surtax. 

"This  office  is  in  receipt  of  your  letter,  March  13,  1917, 
in  which  you  advise  that  a  resident  of  New  York  died  in 
September,  1913,  leaving  a  will  by  which  he  devised  and 
bequeathed  three-fourths  of  his  estate  to  his  three  sons 
absolutely  and  one-fourth  to  a  trust  company  in  trust  to 
pay  the  income  therefrom  to  a  daughter  during  her  life, 
remainder  to  her  issue;  that  it  was  impracticable  for  the 
executors  to  complete  distribution  of  the  estate  or  deter- 
mine the  amount  of  net  income  until  1916,  when  an  ac- 
count was  prepared  showing  the  net  income  accruing  to  each 
beneficiary  during  the  last  three  months  of  1913  and  during 
the  years  1914  and  1915,  and  that  a  large  part  of  the  accu- 
mulated income  was  distributed  in  1916.  You  ask  if  this 
office  will  permit  the  daughter  (beneficiary  under  the 
trust)  to  amend  her  returns  for  1913,  1914  and  1915  and 
include  in  each  the  amount  of  income  accrued  to  her  and 
to  which  she  was  entitled  in  the  year  for  which  the  return 
was  made  but  which  was  not  actually  determined  or  re- 
ceived by  her  until  1916,  or  whether  she  will  be  required  to 
include  the  total  amount  received  in  her  return  of  income  for 
1916.  You  state  that  if  the  income  so  distributed  be  spread 
over  the  years  1913  to  1915,  inclusive,  that  the  amount  dis- 
tributed for  any  one  of  these  years  will  be  less  than  $20,000 
but  that  taken  together  the  amount  would  exceed  $20,000. 
From  the  foregoing  statement,  it  would  appear  that  the 
facts  of  the  case  bring  it  within  the  prescription  of  the 
Treasury  Decision  1943  and  that,  although  the  beneficiaries 
were  determined,  not  until  1916,  did  the  settlement  of  the 
estate  reach  the  stage  where  the  respective  interests  in  the 
income  derived  from  the  estate  were  determinable.  The 
executors  should  make  a  fiduciary  return  for  each  of  the 


INCOME   OF  INDIVIDUALS  39 

years  1913,  1914,  1915  and  1916,  reciting  therein  the  re- 
spective beneficiaries  and  their  interests,  if  the  interest  of 
any  beneficiary  subject  to  withholding  of  normal  tax  by  the 
fiduciary,  was  $3,000  or  over,  and  for  1916  if  the  amount 
paid  or  payable  to  any  beneficiary  from  the  amount  shown 
on  line  3,  page  i  of  the  return,  Form  1041,  was  $3,000  or 
over.  In  all  cases  when  the  amounts  so  distributed  for  each 
of  the  years  1913  to  1916,  inclusive,  added  to  other  income  of 
the  beneficiaries,  would  make  the  income  of  such  benefi- 
ciaries subject  to  the  additional  tax,  said  beneficiaries 
should  make  amended  returns  and  include  therein  the 
amount  received  for  the  years  noted.  If  all  tax  for  which 
the  beneficiaries  are  liable  shall  have  been  paid,  amended 
returns  will  not  be  required  for  the  years  1913  to  1915, 
inclusive.  For  the  year  1916,  return  must  be  made  when 
the  interest  of  a  beneficiary  is  $3,000  or  over,  even  though 
there  is  no  tax  liability,  and  for  this  reason  amended  returns 
should  be  made  for  the  year  1916."  (Letter  to  the  Cor- 
poration Trust  Company,  signed  by  Acting  Commissioner 
David  A.  Gates,  and  dated  March  24,  1917.) 

It  has  been  held  that  commissions  received  on  renewal  pre- 
miums are  taxable  income  in  the  year  received  by  the  agent. 
(Edwards  v.  Keith,  224  Fed.  585.    Affirmed,  United  Insurance 
States  Circuit  Court  of  Appeals,  2d  Circuit,  231  Agents. 
Fed.  no.) 

A  premium  on  a  policy  of  insurance  on  the  life  of  an  insurance 
agent  received  by  him  on  account  or  in  payment  of  commis- 
sions due  him,  in  lieu  of  cash,  is  deemed  to  be  income  to  the 
amount  of  premiums  so  received. 

Ordinarily,  rent  should  be  included  in  the  return  of  the 
landlord  for  the  year  in  which  it  is  received,  regardless  of  when 
it  accrued  or  became  due.     If  the  accounts  of  the  Rentals 
landlord  are  kept  upon  the  accrual  method,  i.  e.,  Received, 
charging  the  tenant  with  the  amount  of  rent  on  the  due  date 
thereof,  and  crediting  the  same  to  Income  from  Rents,  then 
the  return  may  be  made  on  that  basis.    Items  so  charged  that 
are  found  to  be  uncollectible,  may  be  deducted  as  bad  debts 
for  the  period  in  which  the  same  prove  to  be  uncollectible. 

Interest  upon  the  obligations  of  a  State,  or  any  political  sub- 
division thereof,  or  upon  the  obligations  of  the  United  States 


40  INCOME   TAX — LAW  AND  ACCOUNTING 

Interest  on  or  its  possessions,  or  securities  issued  under  the 
m^t"1"  provisions  of  the  Federal  Farm  Loan  Act  of  July  17, 
Obligations  I91^,  are  exempt,  by  law,  from  the  income  tax  ex- 
not  Tax-  cept  as  to  obligations  issued  by  the  United  States 
after  September  i,  1917,  which  are  exempt  "only 
if  and  to  the  extent  provided  in  the  act  authorizing  the  issue 
thereof." 

Under  the  Act  of  1913,  which  contained  the  same  language 
Political  as  the  present  law  with  respect  to  the  exemption  of 
sion  "  "interest  upon  the  obligations  of  a  State  or  any 
Denned.  political  subdivision  thereof"  it  was  ruled  that: 

.  .  .  Special  assessment  districts  created  under  the  laws 
of  the  several  States  for  public  purposes,  such  as  the  im- 
provement of  streets  and  public  highways,  the  provision  for 
sewerage,  gas  and  light,  and  the  reclamation,  drainage  or 
irrigation  of  bodies  of  land  within  such  special  assessment 
districts  when  such  districts  are  for  public  use,  are  political 
subdivisions  of  the  State  within  the  meaning  of  the  above 
proviso. 

It  is  held  that  the  term  "political  subdivision"  includes 
special  assessment  districts  or  divisions  of  a  State  created 
by  the  proper  authority  of  the  State  acting  within  its  con- 
stitutional powers  and  under  its  general  laws,  for  the  pur- 
pose of  carrying  out  a  portion  of  those  functions  of  the 
State  which  by  long  usage  and  inherent  necessities  of  gov- 
ernment have  always  been  regarded  as  public. 

Levee  and  school  districts,  when  lawfully  created  under 
the  authority  of  the  State  and  which  are  authorized  by  the 
laws  of  the  State  to  levy  a  tax  to  meet  the  obligations  of 
such  districts,  are  also  held  to  be  political  subdivisions  of  a 
State  within  the  meaning  of  the  Income  Tax  Law. 

The  income  derived  from  interest  upon  the  obligations 
of  all  such  public  districts  shall,  therefore,  be  excluded  in 
computing  net  income  for  the  income  tax.    (T.  D.  1946.) 
An  individual  who  enters  into  a  contract  with  a  State, 
or  any  political  subdivision  thereof,  for  the  construction  of  a 
Contractor    public  highway,  is  held  not  to  be  an  officer  or  em- 
Work  for      Pl°vee  °f  tne  said  State  or  a  political  subdivision 
State  not      thereof,  and,  therefore,  the  amounts  received  by 
Exempt.       him  from  the  State  or  a  political  subdivision  thereof, 
under  the  terms  of  the  contract,  are  not  exempt  from  tax 


INCOME   OF  INDIVIDUALS  41 

under  the  provisions  of  the  Federal  income  tax  law,  and 
should  be  included  in  any  return  of  annual  net  income  he 
may  be  required  to  render.  (T.  D.  2152.) 

The  first  issue  of  "Liberty  Loan"  bonds,  authorized  by  act 
of  Congress  approved  April  24,  1917,  "  15/30  Year  3^2%  Gold 
Bonds,"  are  exempt  both  as  to  principal  and  interest  interest 
from  all  taxation,  except  estate  and  inheritance  taxes  Liberty 
imposed  by  authority  of  the  United  States  or  its  Bonds 
possessions,  or  by  any  State  or  local  taxing  authority. 

The  second  issue  of  "Liberty  Loan"  bonds,  authorized  by 
act  of  Congress  approved  September  24,  1917,  "10/25  Year 
4%  Convertible  Gold  Bonds"  are  wholly  exempt  Interest 
as  to  the  normal  tax  under  the  Act  of  September  8,  j^mls^ 
1916,  but  as  to  the  additional  income  taxes  (sur-  4%. 
taxes)  and  excess-profits  taxes  and  war-profits  taxes  only  to 
the  amount  of  interest  on  bonds  and  certificates,  the  principal 
of  which  does  not  exceed  in  the  aggregate  $5,000,  owned  by 
any  individual,  partnership  or  corporation. 

It  has  been  ruled  that  each  member  of  a  family  is  entitled  to 
the  exemption  of  interest  on  bonds  aggregating,  in  principal, 
$5,000,  as  per  the  following  telegraphic  inquiry  and  reply: 

"Please  answer  by  wire  at  once  if  possible  our  telegram 
October  second,  as  follows:  'If  husband,  wife  and  minor 
children  each  hold  new  Liberty  fours  and  make  joint  in- 
come tax  return  will  each  member  of  such  family  be  tax 
exempt  as  to  $5,000  bonds  each.  Wire  answer  today  if 
possible.'"  (Answer)  "Husband  and  wife  each  owning  in 
own  right  Liberty  Loan  Bonds  and  certificates  not  exceed- 
ing five  thousand  dollars  each  entitled  to  exemption  pro- 
vided by  Section  Seven  B,  Loan  Act.  Minor  children  hav- 
ing separate  estates  each  entitled  to  same  exemption." 
(Telegram  to  Commissioner  of  Internal  Revenue  from  Lee, 
Higginson  &  Co.,  Boston,  Mass.,  and  the  reply  thereto, 
signed  by  Acting  Secretary  of  the  Treasury,  O.  T.  Crosby, 
and  dated  October  8,  1917.) 

The  following  Treasury  Decisions  have  been  issued  for  the 
guidance  of  Government  officers  and  employees  as  Income  and 

to  what  constitutes  income  and  deductible  expenses;  E^P611868 

,  ..  'of  Govern- 

when  per  diem  charges  m  lieu  of  subsistence  may  be  ment  Em- 
charged,  ployees. 


42  INCOME   TAX — LAW  AND  ACCOUNTING 

Quarters:  Commutation  of  quarters  and  the  money 
equivalent  of  quarters  furnished  in  kind  shall  be  returned 
as  income. 

When  quarters  are  furnished  in  kind,  of  a  less  number  of 
rooms  than  the  number  allowed  by  law,  the  money  equiv- 
alent only  of  the  number  of  rooms  actually  assigned  shall 
be  returned  as  income.  When  quarters  are  furnished  in 
kind,  of  a  greater  number  of  rooms  than  the  number  al- 
lowed by  law,  it  is  to  be  assumed  that  the  excess  number 
is  assigned  for  the  convenience  of  the  Government,  and  the 
money  equivalent  only  of  the  number  of  rooms  allowed 
by  law  shall  be  returned  as  income. 

Heat  and  light:  Amounts  received  by,  or  paid  for,  an 
officer  for  heat  and  light  shall  be  returned  as  income. 

This  includes  the  money  equivalent,  as  fixed  by  the 
Government,  of  heat  and  light  furnished  to  an  officer  oc- 
cupying public  quarters. 

Mileage:  The  difference  between  the  amount  received  as 
mileage  and  the  amount  of  actual  necessary  expenses 
incurred  on  a  journey  shall  be  returned  as  income. 

Mileage,  as  such,  is  not  gain,  profit,  or  income  to  the 
officer,  as  he  is  required  to  pay  his  actual  expenses  while 
traveling  under  mileage  orders.  The  gain,  profit,  or  income 
is  the  difference  between  the  amount  received  as  mileage 
and  the  amount  properly  expended  by  the  officer  while 
traveling;  and  this  difference,  only,  should  be  returned  as 
income. 

The  actual  expenses  to  be  deducted  by  the  individual 
before  ascertaining  his  gain,  profit,  or  income  on  account 
of  mileage  are  the  expenses  for  which  reimbursement  would 
be  made  by  the  Government  if  he  had  traveled  on  an  actual 
expense  basis  instead  of  a  mileage  basis. 

Reimbursement  for  actual  expenses:  Amounts  paid  by 
the  Government  in  the  nature  of  reimbursement  for  sub- 
sistence and  other  items  of  actual  expenses  incurred  while 
absent  on  business  for  the  Government  are  not  required  to 
be  returned  as  income. 

Per  diem  allowances  in  lieu  of  subsistence  while  traveling 
under  orders:  The  difference  between  the  amount  received 
as  a  per  diem  allowance  and  the  amount  of  actual  necessary 
expenses  incurred  on  a  journey  shall  be  returned  as  income. 
(T.  D.  2079.) 

Reference  is  made  to  Mim.  1078,  dated  August  27,  1914, 


INCOME   OF  INDIVIDUALS  43 

requiring  revenue  agents  and  inspectors  paid  from  the 
appropriations  " Collecting  the  Income  Tax"  to  modify 
their  Forms  132  for  August,  1914,  and  thereafter  to  report 
"headquarters"  instead  of  "legal  residence,"  the  "head- 
quarters" being  the  home — the  actual  domicile  of  the 
officer. 

There  has  been  so  much  confusion  resulting,  and  so  many 
officers  have  attempted  to  change  their  homes  for  the 
purpose  of  enabling  them  to  receive  per  diem  in  lieu  of  sub- 
sistence, that  it  is  found  to  be  necessary  to  issue  the  follow- 
ing instructions  as  supplemental  to  the  mimeograph  above 
cited. 

The  Act  of  August  i,  1914,  provides  that  heads  of  execu- 
tive departments  may  prescribe  within  limits  per  diem  in 
lieu  of  subsistence  to  persons  traveling  on  duty  away  from 
their  designated  posts  of  duty  when  not  otherwise  fixed  by 
law. 

The  Comptroller  of  the  Treasury  has  ruled  that  head- 
quarters may  be  established  as  the  designated  posts  of  duty 
of  the  agents  and  inspectors  whose  per  diem  in  lieu  of  sub- 
sistence is  not  fixed  by  law — that  is,  they  will  be  con- 
sidered as  in  a  travel  status  when  on  duty  away  from  their 
headquarters. 

With  the  Comptroller's  ruling  in  view,  the  headquarters 
of  the  officers  referred  to  have  been  fixed  at  their  homes. 

When  a  particular  place  has  been  reported  by  an  agent  or 
inspector  as  his  home  when  commissioned,  he  cannot  there- 
after report  his  home  or  headquarters  elsewhere  for  the 
purpose  of  claiming  per  diem  in  lieu  of  subsistence,  without 
first  obtaining  the  permission  of  the  Commissioner  of  Inter- 
nal Revenue.  This  does  not  mean  that  a  home  may  be 
established  elsewhere  than  the  place  originally  reported  as 
headquarters  and  per  diem  in  lieu  of  subsistence  claimed 
when  within  the  confines  of  the  new  or  most  recent  home,  as 
that  would  be  a  perversion  of  the  law  and  the  regulations 
made  to  carry  the  law  into  effect.  In  other  words,  when  a 
particular  place  is  reported  as  home,  such  place  will  con- 
tinue as  a  home  until  actual  domicile  is  taken  up  elsewhere, 
and  when  that  is  done  or  contemplated  being  done,  the 
Commissioner  should  be  fully  advised  of  the  change  or 
proposed  change,  the  reason  therefor  set  forth  in  full  and 
permission  requested  to  report  the  new  abode  as  "head- 
quarters" on  Form  132.  If  the  Commissioner  approves,  a 


44  INCOME   TAX — LAW  AND  ACCOUNTING 

new  commission  will  issue,  and,  if  he  does  not  approve,  the 
agent  or  inspector,  as  the  case  may  be,  will  not  charge 
per  diem  in  lieu  of  subsistence  when  he  is  at  or  within  the 
confines  of  his  home  as  at  first  reported  or  his  actual  home 
established  thereafter,  as  under  no  circumstances  can  per 
diem  in  lieu  of  subsistence  be  paid  when  such  agent  or 
inspector  is  at  or  within  the  confines  of  his  actual  home. 
(T.  D.  2124.) 

Income  on  foreign  investments  accrued  abroad  to  an  Amer- 
Rates  of  ican  citizen,  placed  to  his  credit  but  not  remitted, 
Foreiei?In-  mav  ^e  reported  as  income  at  the  rate  of  exchange 
vestments,  prevailing  at  the  time  that  such  income  was  credited 
abroad. 

"This  office  acknowledges  receipt  of  your  letter  of 
January  4,  1916,  wherein  you  cite  the  case  of  a  resident 
American  citizen  who  had  accruing  to  him  from  time  to 
time  income  from  foreign  investments  which  was  not  re- 
mitted to  the  United  States  but  was  placed  to  his  credit  in 
different  foreign  countries,  and  request  to  be  advised 
whether  in  computing  income  tax  liability  it  will  be  proper 
to  use  the  rates  of  exchange  prevailing  at  the  time  the 
amounts  were  credited  abroad. 

"In  reply  you  are  advised  that,  in  the  case  cited,  it  will 
be  proper  for  the  individual  to  return  each  item  of  income 
at  the  rate  of  exchange  which  prevailed  on  the  date  it  was 
credited  to  his  account."  (Letter  to  Herbert  M.  Teets, 
New  York,  N.  Y.,  signed  by  Deputy  Commissioner  L.  F. 
Speer,  and  dated  January  n,  1916.) 

This  practice  would  be  inadvisable,  however,  in  the  case  of 
foreign  branches  of  American  concerns.  Under  the  present 
abnormally  high  rates  of  exchange  it  would  be  unwise  to  charge 
a  branch  office  with  the  profit  reported  by  it  at  the  current 
rates.  The  simplest  method,  and  probably  the  easiest  of  ad- 
justment, is  to  adopt  a  fixed  rate  of  exchange  for  each  branch 
or  foreign  country  by  which  rate  all  credits  and  charges  to 
branch  accounts  are  made.  As  funds  are  transmitted  to  the 
United  States  adjustment  is  made  as  between  the  assumed 
rate  and  the  rate  paid.  The  fairness  of  this  method  is  obvious, 
in  that  it  does  not  reflect  in  the  books  of  account  radical  fluc- 
tuations in  exchange,  and,  from  a  bookkeeping  point  of  view, 


INCOME   OF  INDIVIDUALS  45 

renders  the  reconciliation  of  main  and  branch  office  accounts 
comparatively  simple. 

Interest  on  bank  balances  is  returnable  in  the  Interest  on 
year  credited  by  the  bank.  Amount. 

(Interest  on  bank  deposits  or  on  certificates  of  deposit) 
whether  paid  or  accrued  and  unpaid,  must  be  included  in 
the  annual  income  return  of  the  person  entitled  to  receive 
such  interest,  whether  on  open  account  or  on  the  certificate 
of  deposit.  (Art.  67,  Reg.  33.) 

Oftentimes  interest  is  not  all  credited  within  the  calendar 
year  to  which  it  applies.  There  is  no  obligation  on  the  part 
of  the  taxpayer  to  accrue  the  uncredited  portion  unless  his 
return  is  made  on  the  accrual  basis. 

Pensions  received  from  the  United  States  Govern-  p      . 
ment  are  subject  to  the  income  tax.    (T.  D.  2090.) 

According  to  Treasury  Decision  2090,  payments  of  alimony 
are  regarded  as  personal  expenses  of  the  payer  and  the  recipient 
is  required  to  report  the  same  as  income.     This  Alimony 
resulted  in  a  double  tax,  in  that  the  payment  was  notln- 
not  deductible  by  the  payer  and  yet  the  recipient  come- 
paid  an  income  tax  thereon.     The  United  States  Supreme 
Court,  in  an  unreported  case,  has  held  that  alimony  is  not  in- 
come and  is,  therefore,  not  subject  to  an  income  tax. 

The  principles  governing  the  payment  and  receipt  of  alimony 
are  also  true  in  a  case  where  the  husband  and  wife,  under  an 
agreement  of  separation,  live  apart  and  where  the  husband, 
pursuant  to  such  agreement,  pays  the  wife  a  fixed  annual  sum. 
If  the  wife  is  required  under  the  law  to  make  a  return,  she  is 
not  required  to  include  therein  the  amounts  received  from  her 
husband  under  such  agreement. 

All   individuals,   partnerships  and   corporations   making   a 
business  of  collecting  foreign  payments  of  interest  or  dividends 
by  means  of  coupons,  cheques  or  bills  of  exchange,  License 
are  required  to  obtain  a  license  from  the  Commis-  Required 
sioner  of  Internal  Revenue  and  are  subject  to  such  Jjg^f" 
regulations  in  the  conduct  of  their  business  as  the  Foreign 
Commissioner   may   prescribe.      Violation    of    the  Income, 
provision  of  law  in  respect  of  the  requirement  of  a  license  to  do 


46  INCOME   TAX — LAW  AND  ACCOUNTING 

such  business  is  punishable  as  a  misdemeanor,  and  for  each 
offense  subjects  the  offender  to  a  fine  of  $5,000  or  imprison- 
ment for  one  year,  or  both,  in  the  discretion  of  the  court.  [Law, 
Section  9  (d).] 

Foreign  Income  from  foreign  investments  such  as  dividends 

Income  of  on  stOck  of  foreign  corporations  received  by  non- 
resident resident  aliens  is  not  taxable  and  is  not  required  to  be 
Aliens.  included  in  a  return  of  net  income. 

Where  capital  stock  of  a  domestic  corporation  is  registered 
Record  m  t^ie  name  °^  a  citizen  of,  or  resident  alien  in,  the 
Owner  not  United  States,  or  a  domestic  firm  or  corporation, 
Actual  but  the  actual  owner  of  such  stock  is  a  nonresident 
Stock*  a^en  ^dividual,  firm  or  corporation,  it  is  necessary 
Non-resi-  that  the  owner  of  record  disclose  to  the  Commissioner 
dent  Of  Internal  Revenue  the  name  and  address  of  the  ac- 

tual owner  by  filling  out  and  filing  with  the  Col- 
lector of  Internal  Revenue  form  No.  1087,  revised. 

The  intent  and  purpose  of  this  regulation  is  to  provide 
only  in  respect  of  making  return  for  and  payment  of  tax  on 
dividend  income  accruing  to  nonresident  aliens. 

Such  dividends  on  stock  of  domestic  corporations  or 
resident  alien  corporations  are  held,  prima  facie,  to  be  in- 
come to  the  record  owner  of  the  stock  and  such  record 
owner  will  be  liable  for  the  income  tax,  normal  or  additional, 
according  to  his  or  its  individual  or  corporate  status,  unless 
a  disclosure  of  actual  ownership  is  made  to  the  Commis- 
sioner of  Internal  Revenue  which  shall  show  who  the 
actual  owner  is  and  his  address,  and  that  the  record  owner  is 
not  the  actual  owner.  This  showing  shall  be  made  upon  the 
form  herein  provided. 

When  the  record  owner  of  such  stock  is  a  nonresident 
alien  corporation,  etc.,  not  having  an  office  or  place  of 
business  in  the  United  States,  the  debtor  corporation  will 
withhold  the  normal  income  tax  and  pay  the  same  to  the 
proper  officer  of  the  United  States  authorized  to  receive  it 
in  manner  and  form  provided  for  withholding  and  ac- 
counting for  tax  withheld. 

In  all  cases  where  the  actual  owner  is  a  nonresident  alien 
individual  or  corporation  and  the  record  owner  is  an  in- 
dividual, firm,  or  corporation  in  the  United  States,  citizen. 


INCOME   OF  INDIVIDUALS  47 

or  resident  alien,  and  the  aforesaid  showing  of  actual  owner- 
ship is  made,  the  record  owner  will  be  held,  for  income  tax 
purposes,  to  have  the  receipt,  custody,  control  and  dis- 
posal of  the  dividend  income  and  will  be  required  to  make 
return  for  the  actual  owner  and  pay  the  tax  found  by  such 
return  to  be  due.  Where  the  actual  owner  is  a  nonresident 
alien  corporation  return  will  be  made  regardless  of  the 
amount  of  dividend  and  the  normal  income  tax  will  be 
paid;  and  when  the  actual  owner  is  a  nonresident  alien 
individual  a  return  shall  be  made  whenever  the  amount  of 
dividend  is  $3,000  or  over;  and  when  the  net  amount 
thereof  exceeds  $20,000  said  custodian  shall  also  pay  the 
additional  tax  on  such  income.  The  return  for  nonresident 
alien  corporations  shall  be  made  on  Income  Tax  Form 
1031  (1030  for  insurance  companies),  and  return  for  non- 
resident alien  individuals  shall  be  made  on  Income  Tax 
Form  1040. 

When  it  shall  appear  from  the  disclosure  herein  pro- 
vided for  that  the  actual  owner  is  a  nonresident  alien 
partnership  all  certificates  making  such  disclosure  shall  be 
transmitted  to  the  collector  for  the  information  of  the  Com- 
missioner of  Internal  Revenue,  but  no  return  will  be  made 
for  such  partnership  and  no  amount  will  be  retained  from 
such  income  by  the  representative  of  such  partnership  in 
the  United  States  unless  and  until  said  representative  shall 
be  so  instructed  by  the  Commissioner  of  Internal  Revenue. 

The  term  "  corporations "  as  used  above  covers  corpora- 
tions, joint-stock  companies  or  associations,  and  insurance 
companies.  The  term  " nonresident  alien  corporations" 
covers  all  corporations,  joint-stock  companies  or  associa- 
tions, and  insurance  companies  organized,  authorized,  or 
existing  under  the  laws  of  a  foreign  country  and  having  no 
office  or  place  of  business  in  the  United  States;  the  term 
"resident  alien  corporations,"  such  foreign  organizations 
as  have  an  office  or  place  of  business  in  the  United  States. 
(Extract  from  T.  D.  2401.) 

As  stated  in  T.  D.  2401  (ante),  a  stockholder  of  record  is, 
prima  facie,  held  to  be  the  actual  owner,  and  accountable  for 
taxes  thereon.  Where  the  actual  owner  is  a  citizen  or  resident 
of  the  United  States  the  record  owner  is  not  required  to  file 
any  certificate  nor  is  he  obliged  to  include  dividends  on  stock 
so  held  in  his  personal  return.  Upon  inquiry,  in  such  case, 


48  INCOME   TAX — LAW  AND  ACCOUNTING 

the  record  owner  must  show  conclusively  that  he  is  not  the 

actual  owner. 

"This  office  has  before  it  your  letter  of  October  25,  1916, 
wherein  you  refer  to  T.  D.  2382  (amended  by  T.  D.  2401) 
and  request  to  be  advised  what  form  of  certificate,  if  any, 
should  be  executed  by  a  record  owner  of  domestic  stock,  the 
actual  owner  of  which  is  a  citizen  or  resident  of  the  United 
States.  In  reply  you  are  advised  that,  under  the  Federal 
Income  Tax  Law  of  October  3,  1913,  the  withholding  pro- 
visions of  which,  in  so  far  as  they  relate  to  the  taxibility 
of  dividends  on  domestic  stocks  when  paid  to  citizens  or 
residents  of  the  United  States,  are  the  same  as  those  set 
forth  in  the  Income  Tax  Law  of  September  8,  1916,  it  was 
not  found  necessary  that  a  certificate  should  be  filed  by  a 
record  owner  of  stock  when  the  actual  owner  was  a  citizen 
or  resident  of  the  United  States,  and  no  such  certificate 
was  required,  and,  therefore,  none  will  be  required  under 
the  provisions  of  the  act  of  September  8,  1916.  The  pri- 
mary purpose  of  the  certificate  provided  by  Treasury 
Decision  2382  is  to  assist  in  securing  a  proper  administra- 
tion of  the  provision  of  the  Act  of  September  8,  1916,  which 
makes  dividends  on  domestic  stocks  subject  to  income  tax, 
and  to  withholding  of  normal  tax  at  the  source,  when  paid 
to  a  foreign  company,  corporation,  joint-stock  company  or 
association  or  insurance  company  having  no  office  or  place 
of  business  in  the  United  States. 

"The  record  owner  of  stocks  is  not  required  to  include 
in  his  or  its  own  income  tax  return  any  amount  of  dividends 
received  on  stocks  that  actually  belong  to  another,  but  if  a 
question  should  be  raised  as  to  why  dividends  on  stocks 
recorded  in  the  name  of  an  individual,  firm  or  corporation 
are  not  included  in  the  record  owner's  income  tax  return, 
such  owner  will  be  required  to  show  conclusively  that  the 
actual  ownership  of  the  stocks  rested  with  another."  (Let- 
ter to  Lee,  Higginson  &  Company,  Boston,  signed  by  Com- 
missioner W.  H.  Osborn,  and  dated  November  21,  1916.) 

VII.  FARMS  AND  FARMERS 

"The  term  'farm'  as  herein  used  embraces  the  farm  in  the 
Farms  and  ordinary  accepted  sense,  plantations,  ranches,  stock 
Farmers  farms,  dairy  farms,  poultry  farms,  fruit  farms,  truck 
Defined.  farms  and  all  lands  used  for  similar  purposes;  and  for 
the  purposes  of  this  decision  all  persons  who  cultivate,  operate 


FARMS  AND  FARMERS  49 

or  manage  farms  for  gain  or  profit,  either  as  owners  or  tenants, 
are  designated  as  'farmers.' 

"All  gains,  profits,  and  income  derived  from  the  sale  or  ex- 
change of  farm  products,  whether  produced  on  a  income 
farm  or  purchased  and  resold  by  a  farmer,  shall  be  from 
included  in  the  return  of  income  for  the  year  in  Farms- 
which  the  products  were  actually  marketed  and  sold;  and 

"All  allowable  deductions,  including  the  legitimate  expenses 
incident  to  the  production  of  that  year  or  future  years,  may 
be  claimed  in  the  return  of  income  for  the  tax  year  pj.epai(j 
in  which  the  right  to  such  deductions  shall  arise,  Farm 
although  the  products  to  which  such  expenses  and  Expenses 
deductions  are  incidental  may  not  have  been  sold     e  uc     e* 
or  exchanged  for  money;  or  a  money  equivalent,  during  the 
year  for  which  the  return  is  rendered. 

"Rents  received  in  crop  shares  shall  likewise  be  returned  as 
of  the  year  in  which  the  crop  shares  are  reduced  Farming 
to  money  or  a  money  equivalent,  and  on  Shares. 

"Allowable  deductions,   likewise,   shall  be  claimed  in   the 
return  of  income  for  the  tax  year  to  which  they  Farm  Ex- 
apply,  although  expenses  and  deductions  may  be  Senf|LSjDe~ 
incident  to  products  which  remained  unsold  at  the  end  m  Year 
of  the  year  for  which  the  deductions  are  claimed.       Paid. 

"When   farm  products   are   held  for   favorable  Loss  in 
market  prices,  no  deduction  on  account  of  shrink-  ™ue  °* 
age  in  weight  or  physical  value,  or  losses  by  reason  Products 
of  such  shrinkage  or  deterioration  in  storage,  shall  Held  for 
be  allowed.1  Advance. 

"Cost  of  stock  purchased  for  resale  is  an  allowable  deduc- 
tion under  the  item  of  expense,  but  money  expended  for  stock 
for  breeding  purposes  is  regarded  as  capital  in-  Liye  Stock 
vested,  and  amounts  so  expended  do  not  consti-  Purchased, 
tute  allowable  deductions  except  as  hereinafter  stated. 

"Where  stock  has  been  purchased  for  any  purpose,   and 
afterwards  dies  from  disease  or  injury,  or  is  killed  Loss  by 
by  order  of  the  authorities  of  a  State,  or  the  United  J^Stock 
States,  and  the  cost  thereof  has  not  been  claimed  Deductible. 

*By  ruling  (T.  D.  2609)  of  Dec.  19,  1917,  inventories  may  be  valued  at 
cost  or  at  cost  or  market,  whichever  is  the  lower.  (See  page  167.) 


50  INCOME   TAX — LAW  AND  ACCOUNTING 

as  an  item  of  expense,  the  actual  purchase  price  of  such 
stock,  less  any  depreciation  which  may  have  been  previously 
claimed,  may  be  deducted  as  a  loss.  Property  destroyed  by 
order  of  the  authorities  of  a  State,  or  of  the  United  States, 
may,  in  a  like  manner,  be  claimed  as  a  loss. 

"But  if  reimbursement  is  made  by  a  State  or  the  United 
Receipts  States,  in  whole  or  in  part,  on  account  of  stock  killed 
demned  or  Pr°Perty  destroyed,  the  amount  received  shall 
Live  Stock,  be  reported  as  income  for  the  year  in  which  re- 
imbursement is  made. 

Farm  Ma-  "The  cost  of  farm  machinery,  is  not  an  allow- 
chinery  not  able  deduction  as  an  item  of  expense,  but  the  cost 
Deductible.  of  ordinary  tools  may  be  included  under  this  item. 

"Under  the  sixth  deduction  enumerated  in  Paragraph  'B,' 
providing  for  'a  reasonable  allowance  for  the  exhaustion,  wear, 
Deprecia-  and  tear  of  property  arising  out  of  its  use  or  em- 

tion  Al-        ployment'  .         ,  there  may  be  claimed  a  reason- 
lowed  on      ^  /  • '  '.  .    . 
Farm            able  allowance  for  depreciation  on  farm  buildings 

Property.  (other  than  a  dwelling  occupied  by  the  owner), 
farm  machinery,  and  other  physical  property,  including  stock 
purchased  for  breeding  purposes;  but  no  claim  for  depreciation 
on  stock  raised  or  purchased  for  resale  will  be  allowed. 

"Fanners  who  keep  books,  according  to  some  approved 
Fanners*  method  of  accounting,  which  clearly  show  the  net 
Books  of  income,  may  prepare  their  returns  from  such  books, 
Account.  although  the  method  of  accounting  may  not  be 
strictly  in  accordance  with  the  provisions  of  this  decision. 

"A  person  cultivating  or  operating  a  farm,  for  recreation 
or  pleasure,  on  a  basis  other  than  the  recognized  principles  of 
Farm  commercial  farming,  the  result  of  which  is  a  con- 

Main-  tinual  loss  from  year  to  year,  is  not  regarded  as  a 
Onl^or  farmer.  In  such  cases,  if  the  expenses  incurred  in 
Recrea-  connection  with  the  farm  are  in  excess  of  the  re- 
tion.  ceipts  therefrom,  the  entire  receipts  from  sale  of 

products  may  be  ignored  in  rendering  a  return  of  income;  and 
the  expenses  incurred  being  regarded  as  personal  expenses  will 
not  constitute  allowable  deductions  in  the  return  of  income 
derived  from  other  sources."  (T.  D.  2153.) 


DEDUCTIONS  ALLOWED   INDIVIDUALS  51 

VIII.  DEDUCTIONS  ALLOWED  INDIVIDUALS 
The  specific  or  personal  exemptions,  deductible  Personal 
under  the  Act  of  September  8,  1916,  and  the  Act  Exemp- 
of  October  3,  1917,  are  as  follows:  tions. 

Act  of          Act  of 
1916  1917 

To  unmarried  persons $3,000  $1,000 

To  married  persons  or  heads  of  families 4,000  2,000 

To  heads  of  families  for  each  dependent  child  under  the 
age  of  1 8  years  or  if  incapable  of  self-support  be- 
cause mentally  or  physically  defective;  allowed 

only  to  one  parent  of  the  same  family 200  200 

To  guardians  and  trustees  for  each  ward  or  cestui  que 
trust,  if 

Unmarried 3,000  1,000 

Married 4,000  2,000 

To  estates  of  deceased  persons  (citizens  and  residents) 
during  period  of  administration  where  income  is 

not  distributed 3,000  1,000 

By  amendment  of  law  a  nonresident  alien  receives  no  per- 
sonal exemption. 

The  single  or  married  status  of  a  person  at  the  single  or 
close  of  the  year  determines  the  amount  of  the  Married 
personal  exemption.  Status. 

Salaries  of  the  following  are  exempt  from  income  Salaries 
tax :  Exempt. 

President  of  the  United  States  during  the  term  for  which 
he  has  been  elected; 

Judges  of  the  Supreme  Court  and  inferior  courts  of  the  United 
States  now  in  office; 

Officers  and  employees  of  a  State,  or  any  political  subdivision 
thereof,1  but  not  when  paid  by  the  United  States  Government. 

For  the  purpose  of  computing  the  normal  taxes  (2  per  cent, 
under  the  Act  of  1916  and  2  per  cent,  under  the  Act  of  1917) 
the  amount  of  dividends  received  upon  stock  or  Dividends 
from  net  earnings  of  corporations  or  associations,  Creditable, 
which  are  themselves  taxable  upon  their  net  income,  are  de- 
ductible from  the  total  net  income  from  all  sources;  that  is  to 
1  Income  received  by  such  persons  from  other  sources  is  subject  to  tax 
and  must  be  reported. 


52  INCOME   TAX — LAW  AND  ACCOUNTING 

say,  such  dividends  or  earnings  are  only  subject  to  additional 
or  surtaxes. 

Tax  With-  The  amount  of  normal  taxes  withheld  at  the 
held  source  of  payment  are  deductible  in  the  return  of 

Creditable.  tne  individual  entitled  to  credit  therefor. 
A  citizen  or  resident  of  the  United  States  in  computing  his 

Necessary    net  income  is  allowed  as  deductions  from  gross 

Business       •  n  •  i  • 

Expenses      income>  all  necessary  expenses  paid  in  carrying  on 

Deductible,  his  business  or  trade.  Personal,  living,  or  family 
expenses  are  not  deductible.  [Law,  Section  5  (a)  First.] 

All  interest  paid  within  the  year  on  the  indebtedness  of  the 
Interest  taxpayer,  except  that  incurred  for  the  purchase  of 
Deductible,  obligations  or  securities  the  interest  upon  which  is 
exempt  from  income  taxes.  [Law,  Section  5  (a)  Second.] 

Interest  paid  within  the  year  on  indebtedness  incurred  in 
Interest  the  purchase  of  4  per  cent.  Liberty  Bonds  (Second 
PurU?Cd  ^  Issue)  *s  deductible  in  computing  net  income  sub- 
of  Liberty  ject  to  income,  war  income  and  excess  profits  taxes. 
4's.  (T.  D.  2541.) 

The  amount  of  accrued  interest  paid  by  a  purchaser  of  bonds 
to  the  seller  should  be  deducted  from  interest  received  upon  the 
Accrued  bonds  after  they  were  purchased.  That  is  to  say,  the 
o^Bonds  bondholder  should  only  account  as  income  for  the 
Purchased,  interest  received  by  him  in  excess  of  the  accrued  in- 
terest paid  to  the  vendor.  The  amount  of  interest  paid  to  the 
vendor  will  be  accounted  for  as  income  received  by  him. 

Contributions  or  gifts  actually  made  within  the  year  to 
charitable  institutions  existing  as  corporations  or  associations 
Contribu-  and  organized  and  operated  exclusively  for  religious, 
tions  to  charitable,  scientific  or  educational  purposes,  or 
Charities.  to  societies  for  the  prevention  of  cruelty  to  children 
or  animals,  are  deductible  to  an  amount  not  in  excess  of  15  per 
cent,  of  the  taxpayer's  taxable  income  exclusive  of  the  amount 
of  contributions  to  such  charities. l  Contributions  or  gifts  that 
inure  to  the  benefit  of  any  private  stockholder  or  individual  are 
not  deductible. 

All  taxes  are  deductible  except  income  and  excess  profits 

1  This  deduction  may  only  be  made  by  individuals;  the  provision  of  law 
is  not  applicable  to  corporations. 


DEDUCTIONS  ALLOWED  INDIVIDUALS  53 

taxes  paid,  and  assessments  for  local  benefits.    Excess  profits 
tax  assessments  are  deductible,  however,  as  a  credit  T 
in  computing  the  amount  subject  to  income  taxes. 
The  effect  of  this  provision  in  respect  of  the  excess  profits  tax 
where  the  return  is  based  on  receipts  and  disbursements  is 
even  more  favorable  to  the  taxpayer  than  the  deduction  of 
"taxes  paid"  under  the  old  law,  because  the  taxpayer  receives 
the  benefit  of  the  deduction  in  the  period  upon  which  the  tax 
is  computed,  instead  of,  in  the  return  for  the  period  in  which 
the  tax  was  paid,  as  heretofore.    [Law,  Section  5  (a)  Third.] 

Taxes  paid  in  the  nature  of  local  benefits,  such  as  grading, 
paving,  sidewalks,  sewerage,  etc.,  are  not  deductible.  Local  As- 
These  are  deemed  to  be  capital  expenditures  on  y^^^ts 
the   theory   that   the   improvement   increases   the  ductible. 
value  of  the  property  affected  thereby. 

Water  rates  on  business  or  rented  property  may  be  deducted 
as   "necessary   expenses."     They   should   not   be  Water 
deducted  as  taxes.  Rates- 

Payments  by  an  employer  to  the  family  of  a  deceased  person, 
in  the  form  of  a  gratuity,  are  not  deductible  from  pension 
the  return  of  the  employer;  on  the  other  hand,  it 
is  not  required  that  the  amount  of  such  payments  shall  be  in- 
cluded in  the  return  of  the  payee. 

Where  the  monthly  salary  of  an  officer  or  employee  is 
paid  for  a  limited  period  after  his  death  to  his  widow  in 
recognition  of  the  services  rendered  by  her  husband,  no 
services  being  rendered  by  the  widow,  it  is  held  that  such 
payment  is  a  gratuity  and  exempt  from  taxation  under  the 
Income  Tax  Law.  Such  a  payment  would  not,  however, 
be  an  allowable  deduction  as  an  expense  of  carrying  on 
business  in  the  return  of  the  person,  firm,  or  corporation 
paying  same.  (T.  D.  2090.) 

Where  an  employee  pays  the  cost  of  a  fidelity  Premium 
bond  incident  to  his  employment,  he  may  deduct  on  Fidelity 
the  cost  thereof. 

Losses  sustained  during  the  year  which  are  not  compensated 
for   by    insurance    or    otherwise,    including    those 
arising  from  fires,  storm,  shipwreck,  or  other  casualty 
are  deductible. 


54  INCOME   TAX — LAW  AND  ACCOUNTING 

Loss  to  be  deductible  must  be  an  absolute  loss,  not  a 
speculative  or  fluctuating  valuation  of  continuing  invest- 
ment, but  must  be  an  actual  loss,  actually  sustained  and 
ascertained  during  the  tax  year  for  which  the  deduction  is 
sought  to  be  made;  it  must  be  determined  and  ascertained 
upon  an  actual,  a  completed,  a  closed  transaction.  (T.  D. 
2005.) 

A  loss  is  none  the  less  actual  because  an  individual  can 
not  divest  himself  of  the  possession  of  worthless  stock  by  sale, 
but  that  condition  alone  does  not  give  the  loss  in  question 
such  a  character  as  appears  to  the  department  to  have 
been  contemplated  by  the  Income  Tax  Law.1  (T.  D.  2135.) 

By  rulings  of  the  Treasury  Department,  loss  has  been  de- 
nned as  the  difference  between  the  selling  price  and  the  cost, 
LossDe-  where  the  selling  price  is  less  than  the  cost.  In 
fined,  cases  where  the  property  was  acquired  prior  to 

March  i,  1913,  however,  the  measure  of  "cost"  is  the  market 
value  as  of  that  time.  (See  page  34.) 

Under  the  old  income  tax  law  (1913)  the  deduction  of  losses 
sustained  outside  of  the  taxpayer's  business  or  trade  were  not 
Losses  not  deductible.  He  was  required  to  account  for  profits 
in  Business  and  income  from  all  sources,  but  was  prohibited 
or  Trade.  from  deducting  any  losses  not  incurred  in  trade. 
The  amended  law,  however,  provides  that  in  "any  transaction 
entered  into  for  profit,  but  not  connected  with  his  business  or 
trade,  the  losses  actually  sustained  therein  during  the  year  to 
an  amount  not  exceeding  the  profits  arising  therefrom"  are 
deductible.  It  has  been  held  by  the  Treasury  Department  that 
losses  not  sustained  "in  trade"  may  only  be  deducted  "to  an 
amount  not  exceeding  the  profits  derived  from  similar  trans- 
actions." This  provision  would  apply  to  stock  speculations, 
real  estate  operations  and  any  speculative  venture  which  is 
not  embraced  in  the  ordinary  business  or  trade  of  the  taxpayer. 
[Law,  Section  5  (a)  Fifth.] 

Losses  in  Where  a  person  is  engaged  in  more  than  one 
One  Trade  trade  or  business  the  loss  sustained  in  one  is  de- 
£omUCIn-le  ductible  from  the  profit  of  the  other;  but  the  per- 
come  of  son  must  be  actually  engaged  in  the  businesses  or 
Another.  trades. 

1  This  ruling  does  not  apply  to  dealers  in  securities.    See  page  167. 


DEDUCTIONS  ALLOWED  INDIVIDUALS  55 

A  person  must  have  more  than  one  business  in  the  sense 
of  being  engaged  in  more  than  one  trade,  and  may  deduct 
losses  incurred  in  all  of  them,  provided  that  in  each  trade 
it  can  be  clearly  shown  that  he  is  actually  a  dealer, 
or  trader,  or  manufacturer,  or  whatever  the  occupation 
may  be. 

Neither  the  investment  by  an  individual  of  money  in 
the  stock  of  a  company  nor  the  employment  by  the  com- 
pany of  his  services  in  any  official  capacity  can  serve  to 
make  the  business  in  which  the  company  was  engaged  a 
matter  of  his  individual  trade.  (T.  D.  2135.) 

"'In  trade'  is  synonymous  with  business.         In  Trade 

"  Business  "  has  been  denned  as—  Defined. 

"That  which  occupies  and  engages  the  time,  attention 
and  labor  of  any  one  for  the  purpose  of  livelihood,  profit  or 
improvement;  that  which  is  his  personal  concern  or  inter- 
est; employment,  regular  occupation,  but  it  is  not  necessary 
that  it  should  be  his  sole  occupation  or  employment. 

"The  doing  of  a  single  act  incidentally  or  of  necessity,  not 
pertaining  to  the  particular  business  of  the  person  doing  the 
same,  will  not  be  considered  engaging  in  or  carrying  on  the 
business."  (T.  D.  1989.) 

Debts  due  to  the  taxpayer  actually  ascertained  to  be  worth- 
less and  charged  off  within  the  year,  are  deductible.  Bad  Debts 
(See  "Bad  Debts,"  page  213.)  Deductible. 

A  reasonable  allowance  for  the  exhaustion,  wear  Deprecia- 
and  tear  of  property,  arising  out  of  its  use  or  em-  tion  De- 
ployment in  the  business  or  trade,  is  deductible.          ductible. 

In  order  to  render  depreciation  deductible  it  must  be  entered 
in  the  books  of  account  in  such  way  that  it  effects  a  reduction 
of  the  asset  account  to  which  it  is  applicable.  This  may  be 
accomplished  by  establishing  a  Reserve  for  Depreciation  Ac- 
count or  by  actual  reduction  of  the  asset  account  itself.  The 
preferable  method  is  to  create  a  reserve  account,  except,  per- 
haps, with  respect  to  properties  that  are  replaced  often. 

When  the  depreciation  deducted  equals  the  cost  of  property 
depreciated,  or  in  case  of  a  purchase  prior  to  March  i,  1913, 
the  fair  market  value  as  of  that  date,  then  no  further  de- 
duction will  be  allowed.  (See  Chapter  VI,  on  Depreciation, 
page  175.) 


56  INCOME   TAX — LAW  AND  ACCOUNTING 

The  depreciation  referred  to  in  the  Income  Tax  Law  does 
Deprecia-  not  relate  to  evidence  of  a  right  or  interest  in  prop- 
tion.  erty  and  hence,  any  shrinkage  in  the  value  of  bonds, 

Stocks          stocks,  and  like  securities,  due  to  fluctuations  in 
Bonds.         tnejr  market  value,  is  not  deductible  in  a  return  of 
income  as  depreciation  or  loss.1    (T.  D.  2005.) 

"In  the  case  of  oil  and  gas  wells  a  reasonable  allowance 
for  actual  reduction  in  flow  and  production  to  be  ascer- 
Pepletion     tained  not  by  the  flush  flow,  but  by  the  settled 
Oil  and        production  or  regular  flow"  is  a  deductible  item. 
Gas  Wells.  When    such    allowance,    however,    aggregates    the 
capital  originally  invested,  or  in  case  of  purchase  prior  to 
March  i,  1913,  the  fair  market  value  as  of  that  date, 
then    no   further    allowance    for    depletion    will   be    de- 
ductible. 

A  reasonable  allowance  for  depletion  of  mines  is  deductible, 
not  to  exceed,  however,  the  market  value  in  the  mine  of  the 
Depletion  product  thereof,  which  has  been  moved  and  sold 
of  Mines,  during  the  year  for  which  the  return  and  computa- 
tion are  made.  As  in  the  case  of  oil  and  gas  wells,  no  further 
allowance  for  depletion  will  be  allowed  when  the  aggregate 
thereof  equals  the  capital  originally  invested,  except  that  in 
case  the  property  was  acquired  prior  to  March  i,  1913,  then 
no  deduction  will  be  allowed  in  excess  of  the  fair  market  value 
of  the  property  as  of  that  date. 

Improve-  No  deduction  is  allowed  for  any  amount  paid  out 
ments  not  for  new  buildings,  permanent  improvements,  or  bet- 
Deductible,  terments  made  to  increase  the  value  of  its  property. 

No  deduction  is  allowed  for  amounts  expended  to  restore 
Restoring  property  or  for  making  good  the  exhaustion  thereof 
NotPDe^  ^or  w^ich  an  allowance  is  or  has  been  made.  (See 
ductible.  page  183.) 

A  loss  sustained  by  the  voluntary  removal  of  a  building, 
Replaced  for  the  purpose  of  erecting  one  more  modern,  is  not 
Buildings,  deductible  from  a  return  of  net  income,  but  such 
loss  may  be  added  to  the  cost  of  the  new  building. 

Where  a  dilapidated  building  is  taken  down  by  order  of  a 
building  department  of  the  Government,  acting  under  au- 

1 A  dealer  in  securities,  however,  may  inventory  the  same  at  cost  or  al 
cost  or  market  price,  whichever  is  the  lower.  (T.  D.  2609.) 


DEDUCTIONS  ALLOWED  INDIVIDUALS  57 

thority  of  a  statute,   because  such  building  is  a  Buildings 
menace  to  public  safety,  the  owner  thereof  for  the  Taken 
loss  sustained  might  under  some  circumstances,  be  en-  order  of 
titled  to  a  deduction  of  the  difference  between  the  Govera- 
cost  of  the  building  (exclusive  of  land)  and  a  reason-  ment. 
able  allowance  for  depreciation  for  the  years  of  its  existence.1 

The  test  as  to  the  deductibility  of  an  amount  paid  in  com- 
promise or  settlement  of  a  claim,  or  cause  of  action,  for  per- 
sonal injuries  is,  whether  the  liability  was  incurred  Damage 
"in  trade."     A  payment  in  settlement  of  a  suit  Suits, 
for  injuries  caused  by  a  delivery  truck  of  a  corpora-  Judg111611*- 
tion  or  individual  used  "in  trade"  would  be  deductible,  whereas, 
damages  paid  for  injuries  caused  by  the  private  automobile 
of  an  individual  would  not  be  deductible. 

A  reserve  or  fund  set  aside  by  either  an  individual  Insurance 
or  corporation  for  insurance  purposes  is  not  a  de-  ^^not0* 
ductible  item.     But  an  actual  loss  sustained  and  Deductible, 
charged  to  such  reserve  or  fund  may  be  deducted. 

Fire    insurance   premiums    on    a   rented    dwell- 
ing,  not  occupied  by  the  owner,  are  deductible.          Premiums. 

Commission  paid  to  a  real  estate  agent  for  col-  Commis- 
lecting  rents  and  management  of  property  is  an  E°£t*eal 
allowable  deduction.  Agent. 

Contributions   to   the   campaign   expenses   of  a  Political 
political  party  have  been  held  not  to  be  deductible  Campaign 
from  income.  Expenses. 

Any  expenses  which  may  be  incurred  in  con-  Expense 
nection  with  the  procurement  of  nontaxable  income,  NoQ.0001"1 
are  not  deductible  items.  Taxable 

Income. 

Expenses  incurred  in  earning  income  which  is  not  sub- 
ject to  tax  under  the  income  tax  law  do  not  constitute 
allowable  deductions  in  computing  net  income  from 
other  sources  which  are  taxable  under  the  law.  (T.  D. 
2I37-) 

It  is  not  unusual  for  insolvent  corporations  in  the  course 
of  reorganization  to  assess  the  stockholders  a  fixed  sum  for 

1  Make  application  for  special  ruling,  supported  by  affidavit  stating  the 
circumstances  of  the  case,  amount  of  loss,  and  how  computed. 


58  INCOME  TAX — LAW  AND  ACCOUNTING 

Assess-  eacn  share  of  stock  held,  the  proceeds  of  which 
ment  of  are  used  in  the  reestablishment  of  the  defunct 
Stock.  company.  Payments  of  such  assessments  by  stock- 
holders may  not  be  stated  as  expenses  incurred;  they  are  in- 
vestments of  capital  and  do  not  constitute  allowable  de- 
ductions. 

Taxes  paid  by  a  tenant  to  a  landlord  may  be  treated  as 
Taxes  Paid  rent  paid  and  are  deductible  as  an  expense  of  doing 
by  Tenant,  business.  (T.  D.  2090.) 

Life  In-  -Life   insurance  premiums  paid  by   the  insured 

surance  do  not  constitute  allowable  deductions  under  the 
Premiums.  income  tax  law.  (T.  D.  2090.) 

Collateral  inheritance  taxes  levied  under  the  laws  of  the 
State  of  New  York  are  not  such  taxes  as  are  deductible  in 
Inheritance  computing  the  income  tax  of  an  estate  or  a  bene- 
Tax-  ficiary.  Such  taxes  are  deemed  to  be  a  charge 

against  the  corpus  of  the  estate  and  not  against  the  income 
thereof. 

Tax  assessments  against  its  stockholders,  paid  by  a  bank  for 
their  account,  are  not  deductible  from  the  return  of  the  bank. 
Taxes  on  Such  taxes  are,  however,  deductible  by  the  stock- 
Stock  Paid  holder  but  must  be  included  in  the  stockholder's 
by  Bank.  return  as  income.  The  amount  so  included  in  the 
return,  should  be  stated  as  dividends  received,  on  the  income  side, 
and  under  deductions  as  taxes  paid. 

Taxes  assessed  against  the  stockholders  of  a  bank  and 
paid  by  the  bank  in  behalf  of  the  stockholders  do  not  con- 
stitute an  allowable  deduction  from  the  gross  income  of  the 
bank,  but  do  constitute  an  allowable  deduction  in  the 
return  of  the  individual.  If  such  individual  is  subject  .  .  ., 
the  amount  of  taxes  so  paid  should  be  included  in  his 
return  as  income,  the  said  amount  being  considered  as  an 
additional  dividend  to  the  amount  of  the  taxes  paid.  (T.  D. 
2I35-) 

Where  there  has  been  a  change  of  ownership  of  stock  sub- 
ject to  such  tax  assessment  during  a  taxable  year,  it  has  been 
ruled  that  the  owner  thereof  at  the  time  that  the  assessment 
becomes  payable  is  the  party  who  is  entitled  to  the  deduction. 


DEDUCTIONS  ALLOWED  INDIVIDUALS  59 

Customs  duties  paid  during  the  year  are  proper  deductions 
from  an  income  tax  return  and  may  be  treated  as  taxes  paid, 
or  in  the  case  of  a  taxpayer  being  engaged  in  the  Customs 
business  of  importing  it  may  be  added  to  the  cost  Duties, 
of  the  merchandise. 

In  case  of  an  erroneous  or  illegal  assessment  and  collection, 
the  taxpayer  should  appeal l  at  once  to  the  Commissioner  of 
Protest.  Internal  Revenue.  If  the  Commissioner  fails  to 
Limita-°f  resP°nc^  witnm  six  months  after  such  appeal  is 
tions.  made,  suit  for  recovery  may  be  brought;  but  whether 

or  not  he  responds,  suit  must  be  brought  within  two  years  after 
the  action  arose  (date  of  assessment).  In  order  to  maintain 
such  action  it  must  be  shown  that  payment  was  made  under 
protest l  and"  duress  or  coercion.  No  particular  form  of  pro- 
test is  required,  and  to  constitute  duress  or  coercion,  the  mere 
receipt  of  a  notice  containing  a  threat  to  exercise  the  power 
possessed  by  the  Government  or  its  agent  against  the  person 
or  property  of  the  taxpayer  is  sufficient.  The  taxpayer  has 
no  means  of  relief  except  by  payment. 

1  Copies  of  appeal  and  protest  should  be  retained  by  the  taxpayer  to  be 
used  as  matter  of  proof  in  Court  of  Claims. 


CHAPTER  II 
WITHHOLDING  TAX 

The  provisions  of  the  Act  of  September  8,  1916,  requiring  the 
withholding  of  normal  tax  at  the  source  of  payment  were  ma- 
Amended  terially  amended  by  the  Act  of  October  3,  1917. 
Law.  Under  the  present  law  withholding  is  not  required 

except  as  follows: 

(i)  All  persons,  partnerships,  corporations,  joint-stock  com- 
panies, associations  or  insurance  companies,  in  whatever  ca- 
Nonresi-  pacity  acting,  as  lessees,  mortgagors,  trustees, 
dent  Alien  executors,  administrators,  receiver,  or  employers 
Individuals  and  all  Officers  an(j  employees  of  the  United  States, 
having  the  custody,  disposal  or  payment  of  interest,  rent, 
salaries,  premiums,  compensation  or  other  fixed  or  determinable 
annual  or  periodical  gains,  profits  or  income  of 

Nonresident  alien  individuals, 

except  income  derived  from  dividends  or  net  earnings  of  cor- 
porations which  are  taxable  upon  their  net  income,  are  required 
to  deduct  and  withhold  the  normal  tax  of  2  per  cent,  thereon 
(Law,  Section  9  [b]);  such  withholding  is  required  regardless 
of  amount  of  income. 

(A  nonresident  alien  is  entitled  to  no  personal  exemption 
under  present  law,  and  no  deductions  except  by  making  and 
filing  a  true  and  accurate  return  of  income  received  from  sources 
within  the  United  States,  by  February  ist.) 
Income  of  (2)  The  normal  taxes  of  6  per  cent.  (2  per  cent. 
Nonresi-  under  Act  of  1916  and  4  per  cent,  under  Act  of 
Foreign  I9I7)  must  be  deducted  and  withheld  from  in- 
Corpora-  comes  derived  from  sources  within  the  United 
tions.  States  by: 

Nonresident  foreign  corporations  not  engaged  in  business  or 
trade  within  the  United  States  and  having  no  office  or  place 
of  business  therein, 

from  interest  upon  bonds  and  mortgages  or  deeds  of  trust  or 

60 


WITHHOLDING  TAX  6 1 

similar  obligations  of  domestic  or  resident  corporations,  asso- 
ciations and  insurance  companies. 

Section  13  (e)  purports  to  include  in  the  foregoing  provision 
"nonresident  alien  firms,  copartnerships  and  companies"  but 
the  tax  subject  to  be  withheld  is  limited  to  the  normal  tax  on 
corporations  in  the  following  language:  " shall  be  made  ap- 
plicable to  the  tax  imposed  by  subdivision  (a)  of  section  ten." 
By  reason  of  this  defect  in  the  law,  the  Commissioner  of  In- 
ternal Revenue  has  directed  that  there  shall  be  no  withholding 
against  any  form  of  income  of  foreign  copartnerships,  as  indi- 
cated in  the  following  ruling: 

"With  reference  to  your  telegram  of  October  15,  1917, 
and  office  reply  of  October  16,  1917,  you  are  now  advised 
that  under  the  provisions  of  the  Federal  Income  Tax  Law  of 
September  8,  1916,  as  amended  by  the  War  Revenue  Act  of 
October  3,  1917,  no  form  of  income  derived  from  sources 
within  the  United  States  by  a  foreign  co-partnership  having 
no  office  or  place  of  business  in  the  United  States  is  subject 
to  the  withholding  of  normal  income  tax  at  the  source. 
Therefore,  the  Southern  Pacific  Company  is  not  required  to 
withhold  normal  income  tax  from  any  amount  of  interest 
paid  on  its  bonds  to  such  foreign  co-partnership."  (Letter 
to  Gordon  M.  Buck,  General  Counsel,  Southern  Pacific 
Company,  signed  by  Commissioner  Daniel  C.  Roper,  and 
dated  October  26,  1917.) 

(Nonresident  foreign  corporations  are  entitled  to  no  specific 
exemption,  and  no  deductions  unless  returns  are  filed  by  Feb- 
ruary I  St.) 

(3)  The  normal  tax  of  2  per  cent,  shall  be  de-  Dividends 
ducted  and  withheld  from  incomes  derived  from  resi(jent 

sources  within  the  United  States  by:  Alien 

Companies. 

Nonresident  alien  companies,  corporations,  associations  and  in- 
surance companies  not  engaged  in  business  or  trade  within 
the  United  States  and  having  no  office  or  place  of  business 
therein, 

from  dividends  upon  the  capital  stock  or  from  the  earnings  of 


62  INCOME   TAX — LAW  AND  ACCOUNTING 

domestic  or  resident  corporations,  associations  or  insurance 
companies.  [Law,  Section  13  (f).] 

"  Corporation  is  to  pay  dividend  to  non-resident  alien 
corporations  not  engaged  in  business  or  trade  within  the 
United  States  and  not  having  any  offices  or  places  of  busi- 
ness therein.  Shall  paying  corporation  deduct  two  per 
cent  or  shall  it  deduct  six  per  cent  leaving  foreign  corpora- 
tions to  make  returns  on  which  credit  for  dividends  for 
extra  four  per  cent  may  be  shown  and  then  claim  refund  of 
extra  four  per  cent?  Please  telegraph  decision  our  ex- 
pense." (Answer)  "  Domestic  corporation  paying  dividend 
to  foreign  corporation  having  no  office  or  place  of  business 
in  United  States  should  withhold  two  per  cent  only." 
(Telegram  from  the  Corporation  Trust  Company  to  Com- 
missioner Daniel  C.  Roper  and  his  reply  thereto  dated 
October  29,  1917.) 

(4)  The  normal  tax  of  2  per  cent  shall  be  deducted  and  with- 
held from  payments  of  interest  upon  bonds  and  mortgages, 
Tax  Ex-  deeds  of  trust  or  other  similar  obligations  of  cor- 
empt  porations,  joint-stock  companies  or  associations 

Clause.  or  insurance  companies  "if  such  bonds,  mortgages 
or  other  obligations  contain  a  contract  or  provision  by  which 
the  obligor  agrees  to  pay  any  portion  of  the  tax  imposed  .  .  . 
upon  the  obligee  or  to  reimburse  the  obligee  for  any  portion 
of  the  tax  or  to  pay  the  interest  without  deduction  for  any  tax 
which  the  obligor  may  be  required  or  permitted  to  pay  thereon 
or  to  retain  therefrom  under  any  law  of  the  United  States." 

This  provision  of  withholding  is  applicable  to  all  interest 
payments  on  bonds  and  mortgages  or  deeds  of  trust  of  corpora- 
tions containing  the  so-called  " tax-free  covenant"  whereby 
the  corporation  agrees  to  pay  the  interest  without  deduction 
of  tax.  It  applies  to  such  interest  whether  the  same  is  payable 
annually  or  at  shorter  or  longer  intervals  and  regardless  of 
amounts,  and  is  applicable  to  citizens,  and  residents  of  the 
United  States  and  nonresident  alien  individuals.  [Law,  Sec- 
tion 9  (c)J 

Section  3  of  the  War  Income  Tax  provides  that  the  war  in- 
come normal  tax  of  2  per  cent,  shall  not  be  withheld  until  on 


WITHHOLDING  TAX  63 

and  after  January  i,  1918,  and  that  thereafter  only  one  2  per 
cent,  normal  tax  shall  be  withheld.  The  effect  of  this  is  that 
the  obligor  will  pay  2  per  cent,  normal  tax  on  all  interest  ex- 
cept where  an  exemption  certificate  is  filed,  and  the  obligee 
(Bondholder)  receives  credit  for  the  2  per  cent,  paid  at  the 
source  and  pays  the  additional  taxes  himself. 

As  already  observed  nonresident  alien  individuals  are  en- 
titled to  no  exemption.     Individual  citizens  and  residents  of 
the  United  States  may  obtain  the  benefit  of  exemp-  Exemp- 
tion by  filing  with  the  withholding  agent,  on  or  tion- 
before  February  ist,  a  signed  notice  thereof  in  writing.    [Law, 
Section  9  (c).] 

Those  required  under  the  law  to  withhold  taxes  at  the  source 
of  payment  are  required  to  make  returns  thereof  Returns  of 
on  or  before  March  ist  and  to  pay  the  amount  Taxes 
withheld  to  the  Collector  on  or  before  June  isth.  WSMttdd. 

Those  required  to  withhold  taxes  are  made  personally  lia- 
ble for  the  amount  of  the  same,  and  they  are,  by  Responsi- 
law,  indemnified  against  all  persons,  corporations,  bility  and 
partnerships,    associations      and    insurance    com-  Q^  yj-fa.  ^ 
panics  for  deductions  from  income  required  to  be  holding 
made.  Party. 

All  taxes  heretofore  withheld  on  income  of  citizens  or  resi- 
dents, except  from  interest  on  bonds  containing  a  Reiease  Of 
" tax-free  covenant"  clause,  by  amendment  of  the  Taxes 
Act  of  September  8,  1916,  have  been  released  and   Withheld, 
directed  to  be  repaid  to  those  entitled  thereto. 

By  amendment  of  the  provisions  of  Act  of  September  8, 
1916,  with  regard  to  withholding  the  normal  tax  at  the  source, 
on  payments  of  income  to  citizens  and  residents  inf0nna- 
of  the  United  States,  such  withholding  is  no  longer  tion  at 
required  except  as  to  income  from  bonds  containing  Source- 
the   so-called   " tax-free  covenant"   clause.     There  has  been 
substituted  in  place  of  withholding  in  such  cases  a  system  of 
"  Information  at  the  Source,"  whereby  it  is  required  that  all 
payments  to  taxable  persons,  partnerships  or  corporations  dur- 
ing any  taxable  year,  aggregating  $800  or  more  for  such  year, 
must  be  reported  to  the  Collector  of  Internal  Revenue.    Such 
return  should  be  made  for  the  calendar  or  fiscal  year,  as  re- 


64  INCOME   TAX — LAW  AND  ACCOUNTING 

quired  in  respect  of  the  income  tax  return,  and  should  be  filed 
at  the  same  time. 

"Information  at  the  Source"  is  required  in  all  cases  where 
payments  of  rents,  salaries  and  wages,  commissions,  interest, 
or  any  other  fixed  or  determinable  gains,  profits  and  income 
aggregating  $800  or  more  are  made  to  a  taxable  person,  partner- 
ship, corporation,  or  association.  (Law,  Section  28.) 

It  has  been  held  that  such  return  must  be  made  irrespective 
of  the  basis  upon  which  wages  are  computed  and  will  include 
wages  paid  at  piece-work  rates. 

"  Receipt  is  acknowledged  of  your  letter  dated  Octo- 
ber 15,  1917,  requesting  that  you  be  advised  whether  the 
provisions  of  Section  28  added  to  the  Act  of  September  8, 
1916,  by  Section  1211,  Act  of  October  3,  1917,  apply  to  em- 
ployers of  workmen  paid  by  the  hour  or  by  the  piece,  stating 
in  this  connection  as  follows: 

"'One  of  our  clients  employs  some  three  thousand  work- 
men who  are  almost  all  on  piece  work  on  an  hourly  basis 
and  a  large  number  of  them  will  be  paid  more  than  $800 
during  the  year.  Their  wages,  however,  are  not  fixed  as 
would  be  a  weekly  or  monthly  salary,  payments  to  them 
being  variable  from  week  to  week  and  even  from  day  to 
day.' 

(Answer)  "In  reply  you  are  advised  that  in  accordance 
with  the  provisions  of  the  law  as  stated  in  the  Section 
referred  to  above  each  person,  corporation,  partnership, 
etc.,  is  authorized  and  required  to  render  a  true  and  accu- 
rate return  to  the  Commissioner  of  Internal  Revenue  setting 
forth  the  amount  of  salary  or  compensation  and  the  name 
and  address  of  each  employee  who  is  paid  $800  or  more 
during  the  year  1917,  and  subsequent  tax  years.  The 
liability  for  such  return  attaches  in  all  cases  of  payments  of 
salary  or  compensation  amounting  to  $800  or  more  during 
the  year,  without  regard  to  the  basis  of  payment  or  the 
period  during  the  year  in  which  it  was  earned  and  for  which 
it  was  paid."  (Letter  to  Palmer  and  Series,  New  York, 
N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper  and  dated 
October  25,  1917.) 

The  required  reports  must  state  the  name  and  address  of 
recipient,  and  the  total  amount  of  payments. 


WITHHOLDING  TAX  65 

Returns  are  required  of  "Information  at  the  Source"  of  all 
payments  of  interest  on  bonds  and  mortgages  or  deeds  of  trust 
or   similar   obligations   of   corporations,   regardless  interest 
of  amounts.     This  does  not  apply  to  obligations  on  Bonds, 
of  the  United  States  Government. 

Items  of  interest  on  bonds  of  foreign  countries  and  dividends 
from  stock  of  foreign  corporations,  not  payable  in  the  United 
States,  collected  by  persons,  partnerships  or  corporations  as  a 
matter  of  business  are  also  required  to  be  reported  regardless 
of  amounts. 

Under  the  Act  of  1913  it  was  provided  that  an  alien  who 
desired  to  establish  himself  as  a  permanent  resident  of  the 
United  States  and   thereby  obtain  the  benefit  of  Aliens 
withholding   on    the    basis   of  a  "resident"  could  Permanent 
declare  himself  by  filing  a  certificate  with  the  with-  Residents, 
holding  agent. 

Aliens  coming  to  the  United  States  with  the  intention 
of  becoming  residents  thereof  within  the  meaning  and 
intent  of  the  income  tax  statute,  may  establish  that  fact 
and  have  the  privilege  of  resident  aliens  under  the  statute 
by  filing  with  withholding  agents  a  certificate  in  the  follow- 
ing form  (Form  1078)  under  oath,  and  which  certificate 
shall  be  filed  by  said  withholding  agents  with  Collectors  of 
Internal  Revenue  as  justification  for  withholding  on  the 
basis  of  "residence"  in  the  United  States.  (T.  D.  2242.) 

Under  the  amended  law  the  income  of  nonresident  aliens  is 
subject  to  withholding.  No  doubt  the  privilege  afforded  aliens 
under  the  Act  of  1913  will  now  be  extended  to  them  under  the 
present  law.  In  this  connection  it  should  be  noted  that  such 
declaration  by  the  alien  subjects  him  to  the  War  Income  and 
the  War  Excess  Profits  Taxes  upon  his  entire  net  income. 

An  alien,  temporarily  residing  in  the  United  States  or  em- 
ployed therein  for  a  definite  time,  who  has  the  Temporary 
intention  of  leaving  upon  the  termination  of  his 
employment  or  mission,  is  deemed  not  to  be  a  resi-  States, 
dent  of  the  United  States  for  purposes  of  the  income  tax. 

"Residence"  has  been  defined  to  be: 

That  place  where  a  man  has  his  true,  fixed  and  per- 


66  INCOME   TAX — LAW  AND  ACCOUNTING 

Residence  manent  home  and  principal  establishment,  and  to 
Defined.  which,  whenever  he  is  absent,  he  has  the  intention  of 
returning;  and  indicates  permanency  of  occupation  as 
distinct  from  lodging  or  boarding  or  temporary  occupation. 
For  the  purposes  of  the  income  tax, — it  is  held  that 
where  for  business  purposes  or  otherwise,  an  alien  is  per- 
manently located  in  the  United  States;  has  there  his  prin- 
cipal business  establishment  and  is  there  permanently 
occupied  or  employed,  even  though  his  domicile  may  be 
without  the  United  States,  he  will  be  held  to  be  within  the 
definition  of — 

Every  person  residing  in  the  United  States,  though  not  a 
citizen  thereof.  .  .  .  (T.  D.  2242.) 

An  alien  who  resides  in  the  United  States  temporarily,  or 
Visiting  who  comes  here  only  temporarily  for  employment, 
Alien.  wjth  the  view  of  returning  upon  its  completion,  is 

a  nonresident  alien. 

For  the  purposes  of  the  Income  Tax, — it  is  held  that  .  .  . 
aliens  who  are  physically  present  in  the  United  States,  but 
only  temporarily  resident  or  employed  therein  (as  for  a 
reason  or  other  similarly  definite  term,  and  with  the  ex- 
pectation and  intention  of  leaving  the  United  States  upon 
the  termination  of  the  employment  or  accomplishment  of 
the  purpose  which  necessitated  presence  in  the  United 
States,)  are  within  the  class  of 

"Persons  residing  elsewhere  ..."    (T.  D.  2242.) 

The  income  of  an  American  woman  who  marries  a  foreigner 
Wife  As-  is  subject  to  the  same  laws  as  are  applicable  to 
SJ11^68  t-t  her  husband  and  if  he  is  a  nonresident  alien  the 
of  Hus-  wife's  income  in  the  United  States  is  subject  to 
band.  withholding. 

An  American  woman  who  marries  a  foreigner  takes  the 
nationality  of  her  husband.  .  .  .  (T.  D.  2090.) 

The  Internal  Revenue  Bureau  does  not  prescribe  any  par- 
Withhold-  ticular  method  whereby  the  normal  tax  on  stock 
Nonresi-  dividends  paid  to  nonresident  alien  corporations 
dent  Alien  shall  be  withheld,  leaving  the  adjustment  thereof 
Corpora-  to  be  made  between  the  debtor  corporation  and 
Dividend  the  recipient  of  the  dividends. 


WITHHOLDING  TAX  67 

"This  office  has  before  it  your  letter  of  March  17,  1917, 
relative  to  the  withholding  of  normal  tax  upon  a  stock 
dividend  paid  by  a  domestic  corporation  to  a  nonresident 
alien  corporation,  joint-stock  company,  association  or 
insurance  company.  In  reply  you  are  advised  that  while 
the  Federal  Income  Tax  Law  of  September  8,  1916  (Sec- 
tion i3-f),  specifically  provides  that  dividends  paid  to  non- 
resident alien  corporations,  joint-stock  companies,  asso- 
ciation or  insurance  companies  having  no  office  or  place  of 
business  in  the  United  States  are  subject  to  withholding  of 
normal  tax  at  the  source,  it  does  not  prescribe  a  method  to 
be  followed  in  the  withholding  of  that  tax,  and,  therefore, 
the  question  as  to  how  tax  is  to  be  withheld  from  a  dividend 
paid  in  stock  or  scrip  is  one  for  adjustment  between  the 
debtor  corporation  and  the  recipient  of  the  dividend.  In 
view  of  the  fact  that  the  domestic  corporation  will  be  held 
liable  for  normal  tax  at  the  rate  of  two  per  cent,  on  any 
dividend  paid  on  stock  registered  in  the  name  of,  and 
actually  owned  by,  a  foreign  corporation,  joint-stock  com- 
pany, etc.,  having  no  office  or  place  of  business  in  the  United 
States,  the  office  deems  it  proper  to  suggest  that  in  the 
case  of  a  dividend  paid  in  stock  or  scrip,  the  debtor  corpora- 
tion may  protect  its  own  interests  by  requiring  the  foreign 
stockholder  to  deposit  with  it,  prior  to  the  payment  of  the 
dividend,  an  amount  equal  to  the  tax  the  former  will  be 
required  to  pay  to  the  Federal  Government;  or  the  resolu- 
tion providing  for  the  dividend  may  be  so  drawn  as  to 
permit  the  debtor  corporation,  in  the  case  of  a  dividend 
paid  to  a  nonresident  alien  corporation  shareholder,  to 
deduct  from  the  surplus  from  which  the  dividend  is  to  be 
paid,  and  retain  in  its  treasury,  an  amount  sufficient  to 
meet  the  withholding  requirements  and  issue  stock  and 
scrip  in  payment  of  the  balance  due  on  the  stock  held  by 
such  a  shareholder.  In  short,  each  corporation,  so  far  as 
the  law  is  concerned,  must  provide  its  own  method  for 
performing  the  duties  required  of  it  as  a  withholding  agent 
in  each  case  where  that  method  is  not  specifically  provided 
by  the  law."  (Letter  to  Carter,  Ledyard  and  Milburn,  New 
York  City,  signed  by  Deputy  Commissioner  L.  F.  Speer, 
and  dated  April  10,  1917.) 


CHAPTER  III 
INCOME  TAX  AS  APPLIED  TO  PARTNERSHIPS 

IX.  GENERAL  PARTNERSHIPS 

Persons  conducting  business  in  partnership  are  liable  for 
Partners  income  taxes  and  war  income  taxes  only  in  their 
?ndivklu-  individual  capacity.  Under  the  Excess  Profits 
ally  Only.  Tax  Law,  however,  partnerships  are  liable  as  sep- 
arate entities  the  same  as  are  corporations.  (See  page  120.) 

Partnerships  are  not  required  to  make  returns  of  net  income 
unless  especially  ordered  to  do  so  by  the  Commissioner  of  In- 
Returns  ternal  Revenue  or  any  district  collector.  Where 
required,  the  returns  shall  be  prepared  on  Form 
1065,  calling  for  the  gross  income,  deductions  and  credits,  and 
the  names  and  addresses  of  the  individuals  who  would  be  en- 
titled to  the  net  income,  if  distributed. 

The  individual  members  of  the  partnership  are  required  to 
include  in  their  returns  their  prorata  share  of  the  earnings  of 
partnerships  as  shown  by  the  books  of  account,  whether  such 
earnings  were  distributed  or  not. 

A  partnership,  when  required  to  make  a  return,  has  the 
Fiscal  privilege  of  making  the  same  for  its  own  fiscal  year 

Year.  fae  same  as  a  corporation. 

In  case  the  fiscal  year  ends  during  a  calendar  year  for  which 
there  is  a  rate  of  tax  different  from  the  rate  for  the  preceding 
calendar  year  (for  example,  1917  and  1916)  the  rate  for  the  pre- 
ceding calendar  year  will  apply  to  an  amount  of  each  partner's 
share  of  such  partnership  profits  equal  to  the  proportion  which 
the  part  of  such  fiscal  year  falling  within  such  calendar  year  bears 
to  the  full  fiscal  year;  the  rate  for  the  calendar  year  during  which 
such  fiscal  year  ends  will  apply  to  the  remainder.  For  example: 

If  the  fiscal  year  of  a  partnership  ends  on  June  30,  1917, 
that  proportion  thereof  (>£)  which  falls  within  the  year  1916 
should  be  included  as  income  of  the  individual  partner  in  his 


INCOME   TAX  AS  APPLIED  TO  PARTNERSHIPS  69 

personal  return  for  the  year  1916;  and  the  proportion  that 
falls  within  the  calendar  year  1917  should  be  reported  by  the 
individual  as  a  part  of  the  earnings  of  the  calendar  year  1917 
and  be  subject  to  the  rates  of  taxes  applicable  to  that  calendar 
year.  In  other  words,  the  income  of  a  fiscal  year  should  be  so 
prorated  between  the  calendar  years  that  the  partners'  returns 
will  reflect  the  income  of  the  partnership  for  each  calendar  year 
and  respectively  be  subject  to  the  different  rates  of  taxes.1 

Partnership  earnings  must  include  dividends  on  the  capital 
stock  of  corporations,  joint-stock  companies,  or  associations, 
or  insurance  companies  owned  by  the  partnership,  Dividends 
except  that  in  the  case  of  nonresident  aliens  divi-  ^y  ?art-d 
dends  received  from  sources  without  the  United  nerships. 
States  should  not  be  included. 

A  partnership  has  the  same  privilege  of  making  returns  upon  a 
basis  other  than  that  of  receipts  and  disbursements  Method  of 
as  is  accorded  to  corporations  and  individuals,  so  Account- 
long   as   the   method   employed   correctly   reflects  "*£• 
the  income  of  the  partnership.    (See  "Accrual  Basis,"  page  197.) 

"It  is  held  that  the  income  from  a  partnership  accrues 
to  the  individual  partner  at  the  time  his  distributive  interest 
is  determined  and  reducible  to  possession.    In  income 
the  returns  of  income  made  by  individuals  for  the  When 
calendar  year,  therefore,  there  should  be  included  Accrued, 
such  income  accruing  from  the  business  of  partnerships  for 
their  business  years  as  may  have  been  definitely  ascertained 
by  means  of  a  book  balance,  whether  distributed  or  not.   In 
other  words,  members  of  partnerships  are  required  to  make 
returns  of  income  like  other  individuals  for  the  calendar  year, 
and  should  include  in  their  returns  the  net  proceeds  of  their 
interest  in  partnership  profits  ascertained  at  the  end  of  the 
business  year  falling  within  the  calendar  year  for  which  the 
individual  return  is  being  rendered."    (T.  D.  2090.) 

1The  Bureau  of  Internal  Revenue  has  stated  "If  the  partnership  ends  its 
fiscal  year  on  some  day  during  the  calendar  year  (other  than  Dec.  31)  your 
distributive  share  of  its  earnings  or  profits  ascertained  at  that  time  should 
be  reported."  That  is  inadvisable  because  when  an  increase  in  rates  of 
taxes  occurs,  the  increase  offsets  earnings  of  a  prior  period.  Partners  so 
affected  should  file  amended  returns  for  the  pro  rata  part  of  income  earned 
by  partnership  to  Dec.  31,  1916. 


70  INCOME   TAX — LAW  AND  ACCOUNTING 

Premiums  on  policies  of  insurance  on  the  lives  of  partners 
in  favor  of  a  partnership,  commonly  called  "part-  Premiums 
nership  insurance"  are  not  deductible  from  income  °nLife 
of  either  the  partnership  or  individual  partners.  Policies. 
(See  page  107.) 

From  the  net  distributive  interests  reported  by  the  partners 
"there  shall  be  excluded  their  proportionate  shares  received 
Credits  on  from  interest  on  the  obligations  of  a  State  or  any 
Returns^f  Pou*tical  or  taxing  subdivision  thereof,  and  upon 
Partners,  the  obligations  of  the  United  States  (if  and  to  the 
extent  that  it  is  provided  in  the  Act  authorizing  the  issue  of 
such  obligations  of  the  United  States  that  they  are  exempt 
from  taxation)  and  its  possession,  and  that,  for  the  purpose  of 
computing  the  normal  tax  there  shall  be  allowed  a  credit  .  .  . 
for  their  proportionate  share  of  the  profits  derived  from  divi- 
dends." [Law,  Section  8  (d).J 

Partner-  None  of  the  expenses  of  a  partnership  shall  be 

ship  Ex-      deducted  from  the  return  of  net  income  of  an  in- 
penses.         dividual. 


X.  LIMITED  PARTNERSHIP 

In  the  administration  of  the  income  tax  law  it  has  been  ruled 
that  a  limited  partnership,  with  respect  to  its  income,  is  sub- 
Limited  Ject  to  tne  provisions  of  law  applicable  to  corpora- 
Partner-  tions;  that  is  to  say,  a  limited  partnership  must 
ship.  make  its  return  on  the  blank  provided  for  corpora- 

tions (Form  1031,  Revised),  and  must  pay  the  normal  tax  as 
shown  thereby. 

A  limited  partnership  is  one  having  one  or  more  "special 
partners"  whose  liability  is  limited  to  the  amount  invested. 
It  is  created  by  complying  with  the  State  laws  providing  for 
that  form  of  partnership.  The  usual  requirements  are  that 
such  partnership  file  certain  certificates  stating:  the  name  of 
firm  under  which  the  limited  partnership  is  to  be  conducted, 
its  principal  place  of  business,  the  general  nature  of  the  business 
intended  to  be  transacted,  the  names  of  all  general  and  special 
partners  and  their  respective  residences,  the  names  of  the  special 


INCOME  TAX  AS  APPLIED  TO  PARTNERSHIPS      71 

partners  and  the  amount  of  capital  contributed  by  each  of 
them,  and  the  time  that  such  partnership  shall  commence  and 
terminate. 

A  limited  partnership  can  only  be  created  by  complying  with 
requirements  of  the  statute  of  the  State  under  which  it  is 
created. 

The  profits  of  limited  partnerships  making  returns  in 
the  same  manner  as  corporations  make  returns  will  be 
treated  the  same  as  dividends  of  corporations  and  profits 
will  be  returned  in  the  returns  of  individuals  in  Limited 
the  same  manner  as  are  dividends  upon  the  stock  Partner- 
of  corporations;  that  is  to  say,  the  dividends  re-  shlps- 
ceived  from  such  limited  partnerships  will  not  be  subject  to 
the  normal  tax  in  the  hands  of  the  members  of  the  partner- 
ship receiving  the  same.    (T.  D.  2137.) 


CHAPTER  IV 
TAXES  APPLICABLE  TO  CORPORATIONS 

XL  GENERAL  PROVISIONS 

The  Federal  income  tax  is  levied,  assessed,  collected,  and 
Income  of  Paid  annually  upon  the  total  net  income  from 
Corpora-  all  sources,  received  in  the  preceding  calendar 
ganized  in  or  ^sca^  year»  by  every  corporation,  joint-stock 
United  company  or  association,  or  insurance  company, 
States.  organized  in  the  United  States. 

The  tax  is  paid  annually  by  every  corporation,  joint-stock 
company  or  association,  or  insurance  company  organized  under 
Income  of  the  laws  of  any  foreign  country,  upon  the  total 
Corpora-  ne^  mcome  received  from  all  sources  within  the 
tions.  United  States  in  the  preceding  year,  "including 

interest  on  bonds,  notes  or  other  interest-bearing  obligations  of 
residents,  corporate  or  otherwise,  and  including  the  income  de- 
rived from  dividends  on  capital  stock  or  from  net  earnings  of  resi- 
dent corporations,  joint-stock  companies  or  associations,  or  insur- 
ance companies  whose  net  income  is  taxable  under  this  title."  l 

The  tax  of  2  per  cent,  under  the  Act  of  September  8,  1917, 
remains  effective.  In  addition  there  is  imposed  a  normal  tax 
R  of  4  per  cent,  under  the  Act  of  October  3,  1917, 

designated  the  "War  Income  Tax,"  making  a  total 
tax  of  6  per  cent,  upon  the  entire  net  income  of  corporations 
effective  from  January  i,  1917. 

Dividends  received  by  domestic  corporations  are  not  subject 
to  the  war  income  tax  of  4  per  cent.  The  tax  of  2  per  cent, 
however,  under  the  Act  of  1916  is  still  applicable  to  dividends. 

The  following  extract  from  a  summary  of  the  War  Revenue 
Bill  contained  in  the  Congressional  Record  of  October  16,  1917, 
explains  the  reason  for  the  greater  normal  taxes  imposed  on 

income  of  foreign  governments  received  in  the  United  States  is  not 
taxable. 


TAXES  APPLICABLE  TO  CORPORATIONS  73 

corporations  (6  per  cent.)  as  compared  with  those  imposed 
upon  individuals  (4  per  cent.) : 

In  addition  to  the  flat  2  per  cent,  corporation  tax  imposed 
by  the  Act  of  September  8,  1916,  this  act  (War  Income 
Tax)  imposes  another  tax  of  4  per  cent.,  making  the  total 
tax  upon  such  corporations  6  per  cent.  This  is  higher  than 
the  flat  4  per  cent,  total  normal  tax  upon  individuals.  The 
reason  for  this  difference  is  that  the  individual  pays  sur- 
taxes upon  all  his  income  in  excess  of  $5,000,  while  the  cor- 
poration is  allowed  to  retain  for  use  in  the  business  any 
necessary  amount  of  its  net  income,  thus  avoiding  the  pay- 
ment of  any  surtaxes  upon  the  amount  so  retained.  This 
gives  them  the  advantage  over  the  individual  of  being  able 
to  use  in  their  business  as  capital  income  that  has  not  paid 
the  income  surtaxes,  while  the  individual  or  partnership 
can  not  do  so. 

There  is  no  specific  exemption  to  corporations  specific 
either  under  the  Income  Tax  Law  of  September  8,  Exemp- 
1917,  or  the  War  Income  Tax  Law  of  October  3, 1917.  *** 

A  domestic  corporation  is  taxable  upon  its  entire  net  in- 
come regardless  of  where  such  income  was  derived.    A  domestic 
corporation,  for  example,  maintaining  only  a  nom-  Foreign 
inal  office  in  the  United  States,  and  obtaining  all  Income 
of  its  profits  from  foreign  countries,  is,  neverthe-  Taxable- 
less,  taxable  upon  its  entire  net  income,  the  same  as  a  citizen 
residing  in  a  foreign  country. 

The  Excess  Profits  Tax,  enacted  as  a  part  of  the  War  Revenue 
Bill  of  October  3,  1917,  imposes  upon  trades  and  businesses, 
occupations  and  professions  a  flat  tax  of  8  per  cent.,  Excess 
less  an  exemption,  in  cases  where  only  a  nominal  Profits 
or  not  more  than  a  nominal  capital  is  employed,  ^ax* 
and  graduated  rates  of  taxes,  less  a  deduction  for  prewar  profits 
and  an  exemption,  in  cases  where  actual  capital  is  employed. 
(See  Chapter  V,  pages  116  to  174.) 

The  undistributed  surplus  of  corporations  has  not  hereto- 
fore been  subject  to  any  additional  or  surtax  as  has  undistri- 
been  that  of  undivided  profits  of  partnerships  and  in-  buted  Sur- 
dividuals.    As  a  result  of  this  disparity  corporations  Plus  Tax> 
have  been  permitted  to  accumulate  surpluses  which  have  es- 
caped the  additional  taxes  to  which  that  of  other  forms  of 


74  INCOME   TAX — LAW  AND  ACCOUNTING 

enterprise  have  been  subjected.  For  the  purpose  of  correcting 
this  inequality  and  with  the  view  of  coercing  corporations  to 
distribute  their  earnings,  there  was  incorporated  in  the  amend- 
ments to  the  Act  of  September  8,  1916  (enacted  October  3, 
1917),  a  provision  for  a  tax  upon  the  undistributed  profits  of 
corporations.  [Section  10  of  Part  II,  paragraph  (b).] 

This  tax  will  affect  only  the  undistributed  surplus  earned 
after  January  i,  1917.  Under  the  Act  of  September  8,  1916, 
an  unreasonably  large  surplus  could  be  made  subject  to 
the  additional  tax  applicable  to  individuals,  where  the  Secre- 
tary of  the  Treasury  certified  that  in  his  opinion  the  accumu- 
lated surplus  was  unreasonable  for  the  purposes  of  the  business. 
That  section  of  the  law  (Section  3)  states  that  gains  or  profits 
accumulated  beyond  the  reasonable  needs  of  the  business  will 
be  prima  facie  evidence  of  a  fraudulent  purpose  to  escape  the 
tax;  in  mitigation  of  this  language,  however,  it  declares  that 
the  mere  existence  of  a  large  surplus  will  not  in  itself  be  evi- 
dence of  a  purpose  to  escape  the  tax  unless  the  Secretary  of 
the  Treasury  shall  certify  such  to  be  his  opinion.  There  appear 
to  be  no  cases  on  record  where  this  provision  of  existing  law 
has  been  exercised,  and,  it  is  highly  unlikely  that  it  would  be 
enforced  except  in  a  case  of  unconscionable  evasion. 

The  undistributed  surplus  tax  is  only  operative  in  respect 
of  the  net  income  of  the  corporation  remaining  undistributed 
six  months  after  the  close  of  the  calendar  or  fiscal  year,  exclusive 
of  the  amount  of  any  income  taxes  paid  within  the  year.  Furth- 
ermore, it  exempts  any  part  of  such  income  that  has  been  ac- 
tually invested  in  or  is  employed  in  the  business  or  retained 
for  employment  in  the  reasonable  needs  of  the  business,  or  is 
invested  in  obligations  of  the  United  States  issued  after  Sep- 
tember i,  1917. 

How  far-reaching  this  tax  will  prove  to  be  is  a  matter  of  con- 
jecture. That  it  will  be  a  revenue  producer  is  problematical. 
The  enforcement  of  the  spirit  of  the  law  will  be  difficult.  Re- 
gardless of  the  amount  of  earnings  remaining  undistributed  at 
the  end  of  six  months  after  the  fiscal  or  calendar  year,  if  the 
corporation  has  no  available  funds  (cash)  out  of  which  to  pay 
dividends  the  earnings  are  actually  invested  and  employed  in 
the  business,  the  corporation  cannot  consistently  be  ordered 


RETURNS    OF   CORPORATIONS  75 

to  convert  its  property  into  cash  with  which  to  pay  dividends. 
It  is  reasonable  to  assume,  also,  that  an  amount  of  cash  on 
hand  not  in  excess  of  its  current  obligations  is  "retained  for 
employment"  and  is  "reasonably  required"  in  the  business.1 

The  rate  of  tax  is  ten  (10)  per  cent,  upon  the  amount  remain- 
ing undistributed  six  months  after  the  end  of  the  calendar  or 
fiscal  year  of  the  net  income  of  corporations  earned  during  the 
year  as  appears  by  their  income  tax  returns,  after  deducting 
income  taxes  paid  within  the  year.  In  the  event  that  the  De- 
partment should  find  that  any  part  of  the  amount  retained  out 
of  surplus  is  not  required  for  employment  in  the  business  or  is 
not  reasonably  required  therein,  a  tax  of  fifteen  (15)  per  cent, 
would  be  imposed  and  collected. 

The  double  tax  upon  dividends  received  by  corporations, 
under  the  Act  of  September  8,  1916,  is  still  effective.  The 

War  Revenue  Bill  proposed  by  the  Senate   (not  ....  . ,     . 

Dividends, 
accepted  by  the  House)  contained  an  amendment 

of  the  Act  of  1916  correcting  this  defect,  but,  in  the  Bill  drawn 
by  the  Joint  Conference  Committee  of ,  the  Senate  and  the 
House,  which  ultimately  passed,  the  amendment  was  omitted. 
By  provision  of  the  War  Income  Tax  Law,  enacted  October  3, 
1917,  dividends  received  by  corporations  are  not  taxable 
thereon.  Hence,  in  a  consideration  of  the  combined  income 
and  war  income  taxes,  dividends  received  by  corporations  are 
subject  to  the  normal  tax  of  2  per  cent,  and  free  from  the  war 
income  tax  of  4  per  cent. 

It  will  follow,  therefore,  that  the  net  income  of  corporations 
subject  to  the  tax  of  2  per  cent,  will  be  credited  with  the  amount 
of  dividends  received  from  corporations  taxed  upon  their  net 
income  in  ascertaining  the  amount  upon  which  the  4  per  cent, 
tax  will  be  assessed. 

XII.  RETURNS  OF  CORPORATIONS 

All  corporations,  domestic  and  foreign,  are  required  to  make 
returns  on  Form  1031,  Revised,  except  insurance  Form  of 
companies,  whose  returns  are  made  on  Form  1030,  Return. 
Revised. 

1  Earnings  used  for  the  purchase  of  preferred  stock  or  bonds  for  cancella- 
tion are  "retained  for  employment"  in  the  business  and  not  taxable  as 
undistributed  surplus. 


76  INCOME   TAX— LAW  AND  ACCOUNTING 

The  return  of  a  domestic  corporation  shall  be  made  to  the 
Return  of  Collector  of  the  district  in  which  is  located  its  prin- 
Corpora-°  c*Pa*  °^ce>  or  wnere  its  books  of  account  and  other 
tion.  data  are  kept,  from  which  the  return  is  prepared. 

In  the  case  of  a  foreign  corporation,  the  return  should  be 
filed  with  the  collector  of  the  district  in  which  is  located  its 
Return  of  principal  place  of  business  in  the  United  States, 
Corpora-  or  ^  ^  ^as  no  Prmcipal  place  of  business,  office  or 
tion.  agency  within  the  United  States,  then  with  the 

Collector  of  Internal  Revenue  at  Baltimore,  Maryland. 

All  returns  shall  be  filed  with  the  Collector  on  or  before  the 
ist  day  of  March  of  each  year  unless  the  fiscal  year  of  the  cor- 
Due  Date  poration  has  been  designated  in  the  manner  pre- 
of  Return,  scribed,  in  which  case  the  return  must  be  filed 
within  sixty  days  after  the  close  of  such  designated  fiscal 
year. 

When  the  due  date  of  filing  a  return,  March  ist,  or  where 
an  extension  has  been  obtained,  the  last  day  of  such  extended 
When  Last  time,  falls  on  Sunday  or  a  legal  holiday,  the  last 
Filing  Day  due  date  will  be  the  day  next  following  such  Sunday 
Sunday  or  or  ^e&a^  nouday.  In  case  the  return  is  transmitted 
Legal  by  mail  it  should  be  posted  in  ample  time  to  reach 

Holiday.  the  Collector's  office  "under  ordinary  handling  of 
the  mails,  on  or  before  the  date  on  which  the  return  is  thus 
made  due  in  the  office  of  the  Collector." 

"The  return  shall  be  sworn  to  by  the  President,  Vice-presi- 
Execution  dent  or  other  principal  officer,  and  by  the  Treasurer 
of  Returns.  Or  Assistant  Treasurer." 

Corporations  making  returns  on  the  basis  of  the  calendar 
year  will  be  notified  of  the  amount  of  their  assessments  on 
When  Tax  or  before  the  first  day  of  June  of  each  year  and 
Payable.  the  amount  of  said  assessment  shall  be  paid  on 
or  before  the  fifteenth  day  of  June. 

To  any  sum  or  sums  due  and  unpaid  after  ten  days'  notice 
and  demand  thereof  by  the  Collector,  there  shall  be  added 
Delayed  interest  at  the  rate  of  i  per  cent,  per  month  upon 
Payment  said  tax  from  the  time  the  same  became  due,  and 
Penalty.  a  further  penalty  of  5  per  cent,  on  the  amount  of 
the  tax  unpaid. 


RETURNS  OF  CORPORATIONS  77 

A  corporation  whose  fiscal  year  is  not  the  calendar  year, 
may  make  its  return  on  the  basis  of  its  fiscal  year  Returns 
by  complying  with  prescribed  requirements.     The  *°r  Fis£al 
designated  fiscal  year  must  end  on  the  last  day  Corpora- 
of  some  month.    The  corporation  shall  give  notice  tion. 
to  the  Collector  of  the  district  in  which  its  principal  office  is 
located,  at  any  time  not  less  than  30  days  prior  to  Designat- 
March  ist  of  the  year  in  which  its  return  would  ing  Fiscal 
be  filed  if  made  upon  the  basis  of  the  calendar  Year- 
year.     Although   not   required   under  the  law,   it  is  advisa- 
ble  to  obtain   the  consent  of  the   Collector  before  proceed- 
ing to  file  returns  for  any  period  other  than  the  calendar 
year. 

Illustration:  The  fiscal  year  of  a  corporation  ends  on  June 
3oth.  It  has  made  its  returns,  say,  for  the  year  1916  based 
on  the  calendar  year  (January  ist  to  December  3ist,  1916). 
In  order  (December  ist,  1917)  to  obtain  permission  to  make 
its  return  on  the  basis  of  its  fiscal  year  (June  3oth)  it  must 
serve  notice  on  the  Collector  not  later  than  30  days  prior  to 
March  ist,  1918  (on  or  before  January  29th,  1918).  Its  return 
for  six  months  ended  June  3oth,  1917,  must  be  filed  on  or  be- 
fore March  ist,  1918,  and  the  return  for  year  ending  June  3oth, 
1918,  must  be  filed  within  sixty  days  thereafter  (on  or  before 
August  29th,  1918).  From  that  time  on  its  annual  returns 
will  be  made  for  each  year  ending  June  3oth,  which  re- 
turn must  be  filed  within  60  days,  i.  e.,  on  or  before  August 
29th. 

A  corporation  that  has  designated  its  own  fiscal  year  shall 
pay  a  tax  on  the  proportion  of  the  total  net  income  returned 
for  the  fiscal  year  ending  prior  to  December  31,  Apportion- 
1917,  which  the  period  between  January  i,  1917,  ing  Income 
and  the  end  of  such  fiscal  year  bears  to  the  whole  for  1917- 
of  such  fiscal  year;  that  is  to  say,  a  corporation,  the  fiscal  year 
of  which  ends  on  November  30,  1917,  shall  pay  a  tax  (under 
the  old  law)  on  1/12  of  its  net  income  of  said  fiscal  year  (for 
the  month  of  December,  1916)  and  on  11/12  of  said  income 
(for  period  from  January  i  to  November  30,  1917),  under  the 
new  and  old  laws. 

The  tax  under  the  designated  fiscal  year  becomes  due  and 


78  INCOME   TAX— LAW  AND  ACCOUNTING 

payable  105  days  after  the  last  due  date  upon  which  it  is 
Fiscal  Year  required  to  file  the  return,  which,  in  the  illustration 
When  Tax  cited,  would  be  December  i2th  of  the  same  year 
Payable.  that  the  return  is  made> 

Section  3176  of  the  revised  statute  provides  that:  "If  the 
failure  to  file  a  return  or  list  is  due  to  sickness  or  absence,  the 
Extension  collector  may  allow  such  further  time,  not  exceeding 
Fileim  thirty  days,  for  making  and  filing  the  return  or 
Return.  list  as  he  deems  proper."  Application  for  such 
extension  should  be  made  to  the  Collector  on  or  before  the  first 
day  of  March. 

Section  14  (c)  provides,  further,  "That  the  Commissioner 
of  Internal  Revenue  shall  have  authority,  in  the  case  of  either 
corporations  or  individuals,  to  grant  a  reasonable  extension  of 
time  in  meritorious  cases,  as  he  may  deem  proper." 

In  case  of  failure  to  file  a  return  within  the  time  prescribed 
by  law  or  by  the  Collector,  the  Commissioner  of  Internal  Reve- 
Failure  to  nue  sna^  ac^  5°  per  cent,  of  the  amount  of  the 
File  Return  tax.  When  a  return  is  voluntarily,  and  without 
Penalty.  notice  from  the  Collector,  filed  after  the  due  time, 
and  it  is  shown  that  the  failure  to  file  the  return  was  due  to  a 
reasonable  cause  and  not  to  wilful  neglect,  no  such  addition 
shall  be  made  to  the  tax. 

In  case  a  false  or  fraudulent  return  is  wilfully  made,  the 
Commissioner  of  Internal  Revenue  shall  add  to  the  tax  100  per 
False  or  cent,  of  its  amount.  Section  3176  of  the  revised 
Return11611*  statutes  further  provides  that  "The  amount  so 
Penalty.  added  to  any  tax  shall  be  collected  at  the  same 
time  and  in  the  same  manner  and  as  part  of  the  tax  unless  the 
tax  has  been  paid  before  the  discovery  of  the  neglect,  falsity, 
or  fraud,  in  which  case  the  amount  so  added  shall  be  collected 
in  the  same  manner  as  the  tax." 

Section  18  of  the  Income  Tax  Law  further  states  that  "Any 
individual  or  any  officer  of  any  corporation,  joint-stock  com- 
pany or  association  or  insurance  company  required  by  law  to 
make,  render,  sign  or  verify  any  return  who  makes  any  false 
or  fraudulent  return  or  statement  with  intent  to  defeat  or 
evade  the  assessment  required  by  this  title  to  be  made  shall 
be  guilty  of  a  misdemeanor,  and  shall  be  fined  not  exceeding 


RETURNS   OF  CORPORATIONS  79 

$2,000  or  be  imprisoned  not  exceeding  one  year,  or  both,  in 
the  discretion  of  the  court,  with  the  costs  of  prosecution." 

Section  14  (c)  contains  the  provision  that  "If  any  of  the 
corporations,  joint-stock  companies  or  associations,  or  insurance 
companies    aforesaid    shall    refuse    or    neglect    to  Refusal  or 
make  a  return  at  the  time  or  times  hereinbefore  2r6^!ect  to 
specified  in  each  year,  or  shall  render  a  false  or  Return 
fraudulent    return,    such    corporation,    joint-stock  Penalty, 
company  or  association,  or  insurance  company  shall  be  liable 
to  a  penalty  of  not  exceeding  $10,000." 

In  cases  of  refusal  or  neglect  to  make  return,  and  in  cases 
of  erroneous,  false  or  fraudulent  returns,  the  Commissioner 
of  Internal  Revenue  shall,  upon  the  discovery  Return  by 

thereof,  at  any  time  within  three  years  after  such  Commis- 
'.     .       J     ,  i  *          At         i.     sioner  of 

return  is  due,  make  a  return  upon  information  ob-  internal 

tained  as  provided-  for  by  existing  law.    The  as-  Revenue, 
sessment,  based  upon  a  return   so   made,  shall  become  due 
and   payable   immediately   upon  notification  of  the  amount 
thereof. 

"When  a  second  assessment  is  made  in  case  of  any  list, 
statement,  or  return,  which  in  the  opinion  of  the  Second 
collector  or  deputy  collector  was  false  or  fraudu-  Assess- 
lent,  or  contained  any  understatement  or  under-  ment. 
valuation,  no  tax  collected  under  such  assessment  shall  be 
recovered  by  any  suit  unless  it  is  proved  that  the  said  list, 
statement,  or  return  was  not  false  nor  fraudulent  Recovery 
and  did  not  contain  any  understatement  or  un-  of  Amount 
dervaluation ;  but  this  section  shall  not  apply  to  Paid- 
statements  or  returns  made  or  to  be  made  in  good  faith  un- 
der the  laws  of  the  United  States  regarding  annual  depreci- 
ation of  oil  or  gas  wells  and  mines."    (Section  3225,  Revised 
Statutes.) 

The  contents  of  returns  of  net  income  constitute  a  public 
record,  open  to  inspection  "only  upon  the  order  Publicity 
of  the  President  under  rules  and  regulations  pre-  of  Returns, 
scribed  by  the  Secretary  of  the  Treasury  and  approved  by  the 
President." 

A  corporation  which  has  not  been  completely  organized, 


80  INCOME   TAX — LAW  AND  ACCOUNTING 

that  is  to  say,  has  not  accepted  the  charter  granted  to  it,  and 
Corpora-  has  transacted  no  business  should  report  such 
completely  ^acts  to  tne  Collector  and  will  then  be  relieved 
Organized,  of  the  necessity  of  making  a  return  as  a  corporation 
until  its  organization  has  been  completed.  (T.  D.  2152.) 
All  Exist-  The  fact  that  a  corporation  has  received  no 
Nations  mcome  *s  no  excuse  for  failure  to  make  return. 
Must  Make  The  duty  to  make  a  return  depends  upon  cor- 
Returas.  porate  existence  and  not  upon  receipt  of  income. 

In  the  event  that  it  should  not  be  possible  for  a  corporation 
to  obtain  from  its  foreign  branches  the  necessary  data  from 
Returns  of  which  to  make  a  complete  and  accurate  report,  it 
Corpora-  is  advisable  to  prepare  and  file  a  tentative  return 
Maintain-  snowmg>  in  so  far  as  obtainable,  the  income  from  all 
ing  Foreign  operations  of  such  company,  to  which  should  be 
Branches,  attached  a  memorandum  to  the  effect  that,  by  reason 
of  inability  to  obtain  the  necessary  information  in  due  time  the 
income  reported  does  not  include  income  from  all  sources. 
Such  report  should  be  marked  "Tentative  Return."  When 
the  necessary  data  is  received  an  amended  return,  so  marked, 
should  be  filed,  and  the  assessment  will  then  be  fixed  thereon. 

Collectors  of  Internal  Revenue  are  permitted  to  accept  tenta- 
tive returns  in  cases  other  than  that  mentioned  above  (foreign 
branches)  where  true  returns  cannot  be  rendered  in  due  time 
or  within  the  extended  time  as  provided  by  law.  The  practice, 
however,  should  only  be  resorted  to  when  it  is  unavoidable. 

"In  a  case  wherein  a  holding  company  actually  takes  up 
each  month  on  its  books  its  proportionate  share  of  the 
Returns  of    earnings  of  the  underlying  companies,  such  holding 
Holding        company  will  be  required  to  include  in  its  gross 
Companies,  income  the  amounts  thus  taken  up  regardless  of  the 
fact  that  the  same  may  not  have  been  actually  paid  to  it  in 
cash.    The  fact  that  the  underlying  companies  credit  to  the 
holding  company  the  amount  of  earnings  to  which  it  is 
entitled  on  the  basis  of  the  stock  it  holds,  together  with 
the  fact  that  the  holding  company  takes  up  on  its  books 
the  amount  thus  credited,  renders  it  incumbent  upon  the 
holding  company  to  return  these  amounts  as  income,  re- 
gardless of  the  fact  that  the  underlying  companies  needed 


RETURNS   OF  CORPORATIONS  8 1 

these  earnings  and  used  them  in  making  extensions  and 
improvements  and  in  furtherance  of  their  business.  Ex- 
penditures for  such  extensions  and  improvements  being 
chargeable  to  the  property  account  of  the  subsidiary  com- 
panies are  not  deductible  from  the  gross  income  and  will 
therefore  not  have  the  effect  to  reduce  the  earnings  to  their 
respective  shares  of  which  the  stockholders  are  entitled." 
(Supplement  to  Black  on  Income  Taxes.) 

The  existence  of  a  corporation  is  sufficient  to  compel  the 
rendering  of  a  return  of  net  income.  The  fact  that  a  subsidiary 
company  has  had  no  income  and  no  expenses  does  Returns  of 
not  excuse  it  from  making  a  return.  In  case  there  ^^  ary 
has  been  neither  income  nor  expenses,  the  return  panics, 
should  specifically  state  such  facts. 

It  is  quite  usual  for  a  subsidiary  company  to  keep  its  books 
and  maintain  its  principal  office  at  a  place  other  than  where 
its  operations  are  conducted.  In  such  case,  as  where  the  sub- 
sidiary company's  office  is  maintained  in  the  place  where  the 
holding  company  has  its  office,  the  return  should  be  made  in 
the  district  of  the  place  where  its  books  of  account  are 
kept. 

It  is  customary  for  subsidiary  companies  to  transmit  to  the 
parent  company  all  of  its  earnings  after  deducting  its  expenses. 
Such  income  received  by  the  parent  company  is  construed  to 
be  dividends  by  the  subsidiary  company,  subject  to  tax  in  the 
return  of  the  parent  company,  as  well  as  in  the  return  of  the 
subsidiary. 

Receivers  and  trustees  in  bankruptcy,  and  assignees,  who 
are  operating  the  property  or  business  of  corporations  that 
are  subject  to  the  income  tax  must  make  returns  Receivers, 
of   net   income   for   such   corporations.      Corpora-  Trustees, 
tions  in  the  hands  of  receivers,   trustees  or  con-  Assig11668- 
servators  are   subject   to   the  income   tax   and  must  make 
returns. 

A  corporation  organized  during  the  tax  year  should  make 
a  return  as  at  the  end  of  the  calendar  year  unless  Corpora- 
a  fiscal  year  other  than  the  calendar  year  has  been  g^ed*" 
designated.     (Art.   84,   Reg.   33.)     (See   "Returns  During 
for  Fiscal  Year  of  Corporation,"  page  77.)  Tax  Year. 


82  INCOME   TAX — LAW  AND  ACCOUNTING 

A  corporation  that  has  done  no  business  since  its  organiza- 
tion, must,  nevertheless,  make  a  return  as  at  the  end  of  the 
calendar  year  unless  it  has  complied  with  requirements  of  law 
as  to  designating  a  fiscal  year  other  than  the  calendar  year. 
(T.  D.  2090.) 

Return  of  The  following  is  a  reply  to  an  inquiry  of  the  Cor- 
th>nPina~  poration  Trust  Co.,  on  the  question  of  responsi- 
Liquida-  bility  for  payment  of  income  taxes  due  under  a 
tion.  final  return  by  a  liquidating  corporation : 

"In  reply  you  are  informed,  that  under  the  regulations 
of  this  office,  at  the  time  a  corporation  dissolves  or  liqui- 
dates, it  is  required  to  make  what  is  termed  a  final  return, 
and  if  such  return  shows  a  net  income  for  that  portion  of  the 
year  during  which  the  corporation  was  in  business,  the 
proper  officers  of  the  corporation  should  retain  sufficient 
funds  out  of  which  to  pay  the  income  tax  assessable  on 
the  basis  of  the  income  so  returned.  If  the  funds  for  this 
purpose  are  not  retained,  this  office  will  look  primarily  to 
the  officers  of  the  corporation  for  the  payment  of  the  tax 
shown  to  be  due,  and  should  they  fail  to  pay  the  tax,  the 
Government  will  look  to  the  stockholders  for  its  pay- 
ment." Dated  March  22,  1917;  signed  by  Acting  Com- 
missioner David  A.  Gates. 

Liability  of       it  has  been  ruled  that  a  corporation,  dissolved 
Corpora-       ^n  ^ne  vear   I9I^>  prior  to  the  enactment  of  the 
tion  after      War  Revenue  Bill  (October  3,  1917),  is  liable  for 
Dissolu-       taxes  thereunder, 
tion. 

"This  office  has  had  reason  to  review  the  decision  con- 
tained in  that  letter  and  now  holds,  in  accordance  with 
the  decision  of  the  United  States  Circuit  Court  of  Ap- 
peals in  the  case  of  Nicholas  F.  Brady,  et  al.,  executors,  v. 
Charles  W.  Anderson,  Collector,  reported  in  Volume  240, 
Fed.  Rep.,  p.  665,  that  a  corporation  which  was  dissolved 
during  the  year  1917  prior  to  the  approval  of  the  Act  of 
October  3,  1917,  is  subject  to  the  taxes  imposed  by  that 
Act.  In  the  case  cited,  suit  was  brought  by  the  executors 
against  the  Collector  of  Internal  Revenue  to  recover  taxes 
assessed  and  paid  by  the  executors  under  protest  upon 


RETURNS  OF  CORPORATIONS  83 

income  received  by  Nicholas  F.  Brady  during  his  lifetime 
before  the  income  tax  act  of  October  3,  1913,  was  passed. 
Mr.  Brady  died  July  22,  1913;  and  his  executors,  in  accord- 
ance with  the  requirements  of  law  made  a  return  of  in- 
come received  by  him  between  March  i,  the  effective 
date  of  the  Act  and  July  22,  1913,  the  date  of  his  death. 
It  was  contended  by  the  representative  of  the  taxpayer 
that  income  which  had  been  received  by  the  taxpayer  who 
died  prior  to  the  passage  of  the  Act  was  not  subject  to 
tax  under  its  provision,  but  the  Court  held  that:  'The 
effect  of  making  the  Act  retroactive  is,  in  our  opinion,  to 
apply  it  to  Brady  exactly  as  if  it  had  been  enacted  March  i, 
1913.'  Applying  this  holding  of  the  Court  to  the  case  of 
a  domestic  corporation  which  was  dissolved  prior  to  the 
enactment  of  the  Act  of  October  3,  1917,  the  conclusion 
is  reached  that  such  corporation  is  subject  to  the  tax  im- 
posed by  the  Act  of  October  3,  1917,  and  therefore  in 
accordance  with  the  provisions  of  such  Act,  for  the  reason 
that  it  is  retroactive  and  in  force  and  effect  as  of  and 
from  the  first  day  of  January,  1917,  and  applies  to  any  and 
all  corporations  making  returns  or  having  a  taxable  in- 
come during  the  taxable  period  of  1917,  it  should  file  a 
return  in  accordance  with  the  provisions  of  the  Act  of 
October  3,  1917,  and  pay  the  taxes  imposed  by  such  Act." 
(Extract  from  Letter  to  Joseph  and  Alvin  T.  Sapinsky, 
New  York,  N.  Y.,  signed  by  Commissioner  Daniel  C.  Roper, 
and  dated  November  17,  1917.) 

It  has  been  held  that  corporations  required  to  keep  their 
books  according  to  a  uniform  system  of  accounting  prescribed 
by    the    Interstate    Commerce    Commission,    may  Returns 
supply  the  information  called  for  by  Form   1031  ^^mei*e 
"by  classes  rather  than  giving  the  items  in  detail,  Corpora- 
classifying    the   income   and   expenditures   in    the  tions. 
same  manner  as  is  required  as  to  these  items  by  the  Interstate 
Commerce  Commission." 

"In  reply  to  your  request  that  the  railway  companies 
which  you  represent  be  permitted  to  file  a  schedule  of  the 
deductions  allowed  under  the  law  in  conformity  with  the 
Uniform  System  of  Accounts  ordered  by  the  Public  Service 
Commission,  instead  of  the  division  indicated  by  the  return, 


84  INCOME   TAX  —  LAW  AND  ACCOUNTING 

you  are  informed  that  the  division  indicated  in  the  sup- 
plementary statement  forming  a  part  of  the  return  is 
merely  suggestive.  This  office  desires  information,  as  far 
as  possible,  in  detail,  as  to  what  items  go  to  make  up  the 
general  expenses. 

"If  this  information  is  sufficiently  given  in  detail  in  the 
schedule  of  deductions  allowed  under  the  law  in  conformity 
with  the  Uniform  System  of  Accounts  ordered  by  the 
Public  Service  Commission,  this  office  has  no  objection  to 
such  a  statement  being  attached  to  the  return. 

"It  should  be  understood,  however,  that  this  permission 
does  not  carry  with  it  a  ruling  that  all  of  the  items  included 
in  such  schedule  will  be  held  to  be  allowable  deductions 
from  gross  income  for  the  purposes  of  the  income  tax." 
(A  letter  to  James  L.  Quackenbush,  of  New  York,  signed 
by  Commissioner  W.  H.  Osborn,  and  dated  January  6, 


Foreign  corporations  represented  in  the  United  States  by 
Foreign  agents,  or  those  maintaining  branch  offices  therein, 
Corpora-  must  make  returns  of  total  net  income  received 
resented  horn  all  sources  within  the  United  States.  (T.  D. 
by  Agents.  2137.) 

It  has  been  held  that  a  foreign  corporation  represented  by 
an  agent  in  the  United  States  for  the  solicitation  of  orders  who 
has  only  a  mailing  address  and  where  the  merchandise  sold 
is  shipped  direct  to  the  customer,  such  representation  con- 
stitutes doing  business  in  this  country  and  subjects  the  foreign 
corporation  to  an  income  tax.  (T.  D.  2161.) 

A  foreign  corporation  having  several  branch  offices  in 
Foreign  the  United  States  should  designate  one  of  such 
tionPhaa"in  Branches  as  its  principal  office  and  should  also 
Branches12  designate  the  proper  officers  to  make  the  required 
in  U.  S.  return.  (Art.  83,  Reg.  33.) 


XIII.  EXEMPT  ORGANIZATIONS 

The  following  classes  of  corporations  and  organizations  are 
exempt  from  requirements  of  the  income  tax  law  except  the 
withholding  of  tax  at  the  source,  in  cases  where  it  is  required 


EXEMPT  ORGANIZATIONS  85 

under  the  Act  of  October  3,  1917,  and  reporting  and  paying 

the  same  to  the  Government. 

First — Labor,  agricultural  or  horticultural  organization; 

Second — Mutual  savings  bank  not  having  a  capital  stock  repre- 
sented by  shares; 

Third — Fraternal  beneficiary  society,  order,  or  association, 
operating  under  the  lodge  system  or  for  the  exclusive 
benefit  of  the  members  of  a  fraternity  itself  operating 
under  the  lodge  system,  and  providing  for  the  payment 
of  life,  sick,  accident,  or  other  benefits  to  the  members 
of  such  society,  order,  or  association  or  their  depend- 
ents; 

Fourth— Domestic  building  and  loan  association  and  cooperative 
banks  without  capital  stock  organized  and  operated  for 
mutual  purposes  and  without  profit; 

Fifth— Cemetery  company  owned  and  operated  exclusively 
for  the  benefit  of  its  members; 

Sixth — Corporation  or  association  organized  and  operated  ex- 
clusively for  religious,  charitable,  scientific,  or  educational 
purposes,  no  part  of  the  net  income  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual ; 

Seventh — Business  league,  chamber  of  commerce,  or  board 
of  trade,  not  organized  for  profit  and  no  part  of  the  net 
income  of  which  inures  to  the  benefit  of  any  private  stock- 
holder or  individual; 

Eighth — Civic  league  or  organization  not  organized  for  profit 
but  operated  exclusively  for  the  promotion  of  social  wel- 
fare; 

Ninth— Club  organized  and  operated  exclusively  for  pleasure, 
recreation,  and  other  nonprofitable  purposes,  no  part  of 
the  net  income  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  member; 

Tenth — Farmers,  or  other  mutual  hail,  cyclone,  or  fire  insur- 
ance company,  mutual  ditch  or  irrigation  company,  mu- 
tual or  cooperative  telephone  company;  or  like  organiza- 
tion of  a  purely  local  character;  the  income  of  which 
consists  solely  of  assessments,  dues,  and  fees  collected 
from  members  for  the  sole  purpose  of  meeting  its  ex- 
penses; 


86  INCOME   TAX — LAW  AND  ACCOUNTING 

Eleventh — Farmers',  fruit  growers',  or  like  association,  or- 
ganized and  operated  as  a  sales  agent  for  the  purpose  of 
marketing  the  products  of  its  members  and  turning  back 
to  them  the  proceeds  of  sales,  less  the  necessary  selling 
expenses,  on  the  basis  of  the  quantity  of  produce  furnished 
by  them; 

Twelfth — Corporation  or  association  organized  for  the  exclusive 
purpose  of  holding  title  to  property,  collecting  income 
therefrom,  and  turning  over  the  entire  amount  thereof, 
less  expenses,  to  an  organization  which  itself  is  exempt 
from  the  tax  imposed  by  this  title;  or 

Thirteenth — Federal  land  banks  and  national  farm-loan  as- 
sociations as  provided  in  section  twenty-six  of  the  Act 
approved  July  seventeenth,  nineteen  hundred  and  sixteen, 
entitled  "An  act  to  provide  capital  for  agricultural  de- 
velopment, to  create  standard  forms  of  investment  based 
upon  farm  mortgage,  to  equalize  rates  of  interest  upon 
farms  loans,  to  furnish  a  market  for  United  States  bonds, 
to  create  Government  depositaries  and  financial  agents 
for  the  United  States,  and  for  other  purposes." 
Fourteenth — Joint-stock  land  banks  as  to  income  derived  from 
bonds  or  debentures  of  other  joint-stock  land  banks  or 
any  Federal  land  bank  belonging  to  such  joint-stock  land 
bank. 

Under  the  language  of  the  Income  Tax  Law  of  1913,  it  was 
held  that  exempt  corporations  and  organizations  were  exempt  from 
Exempt  all  provisions  of  the  law.  Under  the  law,  enacted 
Corpora-  September  8,  1916,  it  was  ruled  by  the  Commis- 
quired^to  sioner  of  Internal  Revenue  that  the  fourteen  dif- 
Withhold  ferent  kinds  of  exempt  corporations  and  organiza- 
Tax-  tions  named  in  the  law  are  relieved  only  of  the  tax 

on  their  income,  and  "  that  said  corporations  and  organizations 
are  required  to  answer  under  all  the  other  provisions  of  the 
statute  as  to  withholding  and  making  returns  of  tax  withheld." 
Under  the  Act  of  October  3,  1917,  this  ruling  will  only  be  ap- 
plicable to  income  payable  to  nonresident  alien  individuals, 
foreign  corporations  and  partnerships,  and  in  respect  of  in- 
terest on  corporate  obligations  containing  a  tax-free  covenant 
clause. 


EXEMPT  ORGANIZATIONS  87 

In  all  cases  where  there  is  a  question  of  doubt  as  to  whether 
an  organization  is  or  is  not  exempt,  it  is  recom-  Organiza- 
mended   that  a   special   ruling   be   obtained   from  £onltf^ 
the  Commissioner  of  Internal  Revenue.     The  ap-  as  to  Ex- 
plication  for  such  ruling  should  be  accompanied  emption. 
by  an  affidavit  stating: 

(a)  The  purpose  and  nature  of  the  organization 

(b)  The  source  of  its  income 

(c)  The  disposition  of  its  income 

(d)  Whether  or  not  any  of  its  net  income  will  inure  to  the 

benefit  of  any  private  stockholder  or  individual. 
It  has  been  ruled  that  foreign  as  well  as  domestic  Exempt 
corporations    and    organizations,    of    the    classes  organiza- 
enumerated  in  the  exempt  list,  are  included  therein,  tions. 

"Receipt  is  acknowledged  of  your  letter  of  November  17, 
1916,  and  in  reply  you  are  advised  that  the  Federal  Income 
Tax  Law  of  September  8,  1916,  provides  that  every  or- 
ganization enumerated  in  Section  II  of  that  statute  is 
exempt  from  Federal  Income  Tax  on  its  net  earnings, 
profits  or  income,  and  the  office  holds  that  the  provisions 
apply  whether  the  organization  be  domestic  or  foreign. 
In  a  case  where  a  foreign  organization  desires  to  be  held 
exempt  from  Federal  Income  Tax,  and  a  doubt  exists  as  to 
whether  or  not  it  comes  within  the  class  of  organizations 
enumerated  in  Section  II,  it  will  be  required  to  file  a  copy 
of  its  charter  and  by-laws,  and  an  affidavit  executed  by  its 
principal  officer  showing  the  disposition  made  of  such  in- 
come as  it  receives,  and  stating  specifically,  whether  or  not 
any  of  the  income  so  received  inures  to  the  benefit  of  any 
individual  stockholder.  The  question  of  whether  or  not 
the  office  will  hold  the  organization  to  be  ' exempt'  will 
be  determined  by  the  facts  shown  in  its  charter,  by-laws 
and  affidavit. ' '  (Letter  to  the  Corporation  Trust  Company, 
signed  by  Commissioner  W.  H.  Osborn,  and  dated  Decem- 
ber 6,  1916.) 

A  so-called  "close  corporation,"  which  usually  consists  of 
members  of  a  family,  is  not  such  corporation  as  is  Close  Cor- 
exempt  from  the  requirements  of  the  income  tax  poration. 
law. 


88  INCOME   TAX — LAW  AND  ACCOUNTING 

A  corporation  formed  as  a  family  affair  to  hold  property 
together  and  not  to  sacrifice  in  selling  does  not  come  within 
the  class  of  corporations  specifically  enumerated  as  exempt 
from  the  requirements  of  the  Federal  Income  Tax  Law,  and 
is  required  to  make  a  return  of  annual  net  income  showing 
therein  all  income  arising  and  accruing  to  it  from  all  sources 
and  to  pay  any  income  tax  shown  by  such  return  to  be  due. 
(T.  D.  2137.) 

The  fact  that  a  corporation  or  association  was  not  organized 
for  profit  is  immaterial  in  determining  whether  or  not  such 
Corpora-  corporation  or  association  must  make  returns  of  net 
Organized  mcome-  All  corporations,  joint-stock  companies 
for  Profit,  or  associations  and  insurance  companies,  unless 
specifically  mentioned  in  the  law  as  exempt,  must  make  returns. 

The  tax  imposed  by  the  Federal  income  tax  law  is  not 
imposed  only  upon  such  corporations  as  are  organized  and 
operated  for  profit.  Any  corporation,  joint-stock  company, 
or  association,  and  any  insurance  company,  no  matter  how 
created  or  organized  or  what  the  purposes  of  its  organization 
may  be,  unless  it  comes  within  the  class  of  organizations 
specifically  enumerated  in  the  act  as  exempt,  will  be  re- 
quired to  make  returns  of  annual  net  income  and  pay  in- 
come tax  upon  the  net  income  which  arises  and  accrues  to 
it  during  the  year. 

A  corporation  is  not  exempt  simply  and  only  because  it  is 
primarily  not  organized  and  operated  for  profit.  If  income 
within  the  meaning  of  the  law  arises  and  accrues  to  a  cor- 
poration which  is  not  organized  and  operated  for  profit, 
such  income  will  be  subject  to  the  tax  imposed  by  this  act. 

It  is  therefore  held  that  commercial  men's  associa- 
tions, .  .  .  and  like  organizations  come  within  the  re^ 
quirements  of  the  law.  (T.  D.  2152.) 

The  fact  that  all  the  stock  of  a  nonexempt  corporation  is 
owned  and  controlled  by  an  association,  exempt  under  the 
Corpora-  law,  does  not  relieve  such  corporation  of  making 
tionsCon-  returns.  The  liability  of  a  corporation  to  report 
Exempt  anc^  Pay  tne  income  tax  is  not  contingent  upon 
Organiza-  the  ownership  of  its  stock  but  upon  the  character 
tions.  Of  the  organization,  which  latter  alone  determines 

whether  or  not  it  is  exempt. 


EXEMPT  ORGANIZATIONS  89 

A  stock  corporation  all  of  whose  stock  is  owned  by  a 
"corporation  or  association  organized  and  operated  exclu- 
sively for  religious,  charitable,  scientific  or  educational 
purposes,  no  part  of  whose  net  income  inures  to  the  bene- 
fit of  any  member,  stockholder,  or  individual,"  is  required 
under  the  provisions  of  the  Federal  Income  Tax  Law  to 
make  a  return  of  annual  net  income  and  pay  income 
tax. 

The  fact  that  all  of  the  stock  of  the  corporation,  except 
shares  qualifying  the  directors,  is  owned  by  a  corporation 
which  itself  comes  within  the  class  specifically  enumerated 
as  exempt,  does  not  relieve  the  first-named  corporation 
from  liability  under  the  Income  Tax  Law.  The  liability  of  a 
corporation  to  the  requirements  of  the  Federal  income  tax 
law  is  not  contingent  upon  the  ownership  of  its  stock. 
(T.  D.  2137.) 

Treasury  Department  rulings  indicate  that  organizations  oper- 
ated for  profit,  regardless  of  the  character  of  their  pursuits,  are 
subject  to  the  income  tax  and  must  make  returns.  Organiza- 
Specific  rulings  to  this  effect  have  been  made  with  operated 
respect  to  agricultural  and  horticultural  organiza-  for  Profit, 
tions  (T.  D.  2090)  and  cooperative  dairies.    (T.  D.  1996.) 

In  Union  Hollywood  Water  Co.  v.  John  P.  Coster,  Water 
Collector  (238  Fed.  329),  it  was  held  that:  nT**** 

The  fact  that  plaintiff  was  a  public  utilities  cor-  Exempt, 
poration  which,  under  the  laws  of  the  State,  was  not  the  owner 
of  the  property  but  merely  intrusted  with  the  use  thereof  which 
it  must  devote  to  the  public,  does  not  entitle  it  to  more  favor- 
able treatment  than  other  corporations,  it  being  a  corporation 
organized  for  profit,  having  a  capital  stock  represented  by 
shares,  and  the  Act  making  no  exceptions  in  favor  of  public 
utilities. 

XIV.  INCOME  or  CORPORATIONS 

The  term  "net  income"  as  used  in  the  income  tax  law  with 
respect   to   corporations,   may   be   defined   as   the  Net 
"gross  income"  less  deductions  allowed  by  law.  Income. 

Gross  income  of  manufacturing  companies  shall  con- 


QO  INCOME   TAX — LAW  AND  ACCOUNTING 

sist  of  the  total  sales  of  manufactured  goods  during  the 
Gross  year  covered  by  the  return,  increased  or  decreased 

Income  by  the  gajn  or  ioss  as  shown  by  the  inventories  of 
turSg  a(  finished  and  unfinished  products,  raw  material,  etc., 
Corpora-  at  the  beginning  and  end  of  the  year.  To  this  amount 
tions.  should  be  added  the  income,  gains,  or  profits  from  all 

other  sources  as  shown  by  the  books  of  account.  (Art.  104, 
Reg.  33.)  (See  Manufacturing  Corporation  Operating  Cost- 
system,  page  216.) 

Gross  income  of  mercantile  companies  shall  include  the 
total  merchandise  sales  during  the  year,  increased  or  de- 
Gross  creased  by  the  gain  or  loss  as  shown  by  the  inven- 
Mercantile   tor*es  °^  mercnandise  at  the  beginning  and  end  of 
Corpora-1  &  ^e  vear  ^or  wmcn  the   return   is   made;    to   this 
tions.  amount   should  be  added    the   income,   gains,   or 
profits  derived  from  all  other  sources  as  shown  by  the  books 
of  account.    (Art.  105,  Reg.  33.) 

Gross  income  of  miscellaneous  corporations  consists  of 
the  total  revenue  derived  from  the  operation  and  man- 
Gross  agement  of  the  business  and  property  of  the  corpora- 
Income         tion  making  the  return,  together  with  all  amounts  of 
income,  including  the  income,  gains,  or  profits  from 
Corpora-      a^  °ther  sources,  as  shown  by  the  books  of  account, 
tions.  (Art.  106,  Reg.  33.) 

In  the  case  of  a  large  contracting  company,  which  has 

numerous  uncompleted  contracts  which  probably,  in  some 

Gross  cases,  run  for  periods  of  several  years,  there  does  not 

^lcome         appear  to  be  any  objection  to  such  corporation  pre- 

in^Cor-'      paring  its  return  in  such  manner  that  its  gross  income 

porations.     will  be  arrived  at  on  the  basis  of  completed  work — 

that  is  to  say,  on  jobs  which  have  been  finally  completed 

and  payments  made  during  the  year  in  which  the  return 

is  made.    If  the  gross  income  is  arrived  at  in  this  method, 

the  deductions  from  gross  income  should  be  limited  to  the 

expenditures  made  on  account  of  such  completed  contracts. 

(T.  D.  2161.) 

It  will  be  noted  from  these  definitions  that  the  gross 

income  embraces  not  only  the  operating  revenues,  but  also 

Gross  income,  gains,  or  profits  from  all  other  sources,  such 

Income         as  rentals,  royalties,  interest,  and  dividends  from 

From  All      stock  owned  in  other  corporations  .  .  .,  also  profits 

Sources.       made  from   the  sale  of  assets,   investments,   etc. 

(Art.  107,  Reg.  33.) 


INCOME   OF  CORPORATIONS  9 1 

Gross  income  of  insurance  companies  consists  of  the  total 
revenue  derived  from  the  operation  of  the  business,  includ- 
ing income,  gains,  or  profits  from  all  other  sources,  Qross  JQ. 
as  shown  by  the  entries  on  the  books  of  account  come  In- 
within  the  calendar  or  fiscal  year  for  which  the  re-  surance 
turn  is  made,  except  as  modified  by  the  express  Companies, 
exemptions  of  the  articles  which  apply  to  mutual  fire,  mutual 
marine,  and  life  insurance  companies.    (Art.  97,  Reg.  33.) 

Gross  income  of  banks  and  other  financial  institutions 
consists  of  the  total  revenue  derived  from  the  operation  of 
the  business,  including  income,  gains,  or  profits  Gross 
from  all  other  sources,  as  shown  by  the  entries  on  Income 
the  books  of  account,  within  the  calendar  or  fiscal  of  Banks, 
year  for  which  the  return  is  made.     (Art.  96,  Reg.  33.) 

Mutual  associations  or  companies,  such  as,  fire,  employers' 
liability,  workmen's  compensation,  casualty  insurance  com- 
panies, that  require  their  members  to  make  premium  deposits  to 
provide  for  losses  and  expenses,  are  not  required  Mutual 
to  return  as  income  any  portion  of  the  premium  Companies, 
deposits  returned  to  policyholders.  Income  from  all  other 
sources,  however,  including  that  received  from  its  members 
as  premium  deposits,  retained  by  the  companies  for  purposes 
other  than  the  payment  of  losses  and  expenses  and  reinsurance 
reserves,  is  returnable  as  income. 

Dividends  may  be  declared  payable  in  cash  or  the  equivalent 
of  cash.     Where  dividends  are  declared  payable  in  securities 
of  another  corporation  or  of  a  foreign  government,  Dividends 
the  value  placed  upon  such  securities  should  be  Payable  in 
the  fair  cash  market  value  thereof  as  at  the  time  Securities, 
the  dividend  is  declared. 

Profit  or  income  from  the  sale  of  capital  assets  Profit  on 
is  subject  to  the  income  tax  and  must  be  included  capital 
in  the  return  of  corporations.  Assets. 

For  the  purpose  of  ascertaining  the  gain  derived  from  the 
sale  or  other  disposition  of  property,  real,  personal  Sales  of 
or  mixed,  acquired  before  March  i,  1913,  the  fair  Property 
market  price  or  value  of  such  property  as  of  March  i,  pjjj^o 
1913,  shall  be  the  basis  for  determining  the  amount  March  1st, 
of  such  gain  derived. 


92  INCOME   TAX — LAW  AND  ACCOUNTING 

For  method  of  computing  profit  or  loss  on  properties  acquired 
prior  to  March  i,  1913,  see  page  34. 

Interest  on  Interest  received  on  sinking  funds  or  from  any 
Sinking  investment  of  reserve  funds,  shall  be  accounted 
Funds.  for  as  income. 

In  cases  wherein  corporations  set  aside  and  place  in  a 
sinking  fund  under  the  control  of  trustees  their  own  bonds 
or  the  bonds  of  other  corporations  which  they  may  own, 
it  is  held  that  the  fund  thus  set  aside  by  the  corporation  is 
an  asset  of  the  corporation,  and  any  increment  to  that 
fund  as  a  result  of  investments  made  by  the  trustees  having 
the  same  in  charge  is  income  to  the  corporation  and  should 
be  so  included  and  accounted  for  in  its  returns  of  annual  net 
income. 

If  the  trustees  have  invested  the  amount  of  the  sinking 
fund  reserve  or  any  portion  of  it  in  the  bonds  of  the  corpora- 
tion and  such  corporation  pays  to  the  trustees  the  interest 
on  these  bonds,  such  corporation  will  be  permitted  to  de- 
duct such  interest  from  its  gross  income,  provided  the 
amount  of  the  interest  thus  paid,  plus  the  interest  on  any 
other  outstanding  indebtedness  which  it  may  have,  does 
not  exceed  the  limit  fixed  by  the  law,  and  provided  further 
that  the  interest  paid  to  the  trustees,  together  with  all 
other  earnings  on  investments  of  the  sinking  fund  made  by 
the  trustees,  is  included  in  the  income  of  the  corporation. 
(T.  D.  2161.) 

Where  a  corporation  sustains  a  deficit  (impairment  of  capital) 
Assess-  at  the  close  of  a  year,  which  the  stockholders  pro- 
ment  of  pose  to  make  good  by  voluntary  contribution, 
Capita?  suck  contribution  or  assessment  is  not  income  to 
Stock  Not  the  corporation.  In  a  letter  to  Dorman  &  Dana, 
Income.  New  York,  dated  February  21,  1916,  Commis- 
sioner W.  H.  Osborn  expressed  himself  as  follows: 

"It  is  therefore  the  present  opinion  of  this  office  that  the 
amounts  paid  by  the  stockholders  pursuant  to  this  so-called 
voluntary  assessment,  are  to  all  intents  and  purposes,  if  not 
in  fact,  additional  payments  for  the  stock  which  they  hold, 
that  is  to  say,  such  payments  are  simply  an  addition  to  the 
capital  stock  of  the  company.  Since  amounts  paid  for  or  on 
account  of  capital  stock  issued  do  not  constitute  income 


INCOME  OF  CORPORATIONS  93 

within  the  meaning  of  the  Federal  income  tax  law,  it  is  held 
that  these  payments  represent  voluntary  assessments  upon 
the  stock  held  by  the  individual  stockholders  and  do  not 
constitute  income  to  be  returned  for  the  purpose  of  the 
income  tax." 

According  to  the  following  ruling  by  the  De-  Exchange 
partment  in   the  case   of  an   exchange   of   stocks  ^  Bon^s 
and  bonds  for  an  interest  in  property,  the  value  in  Reor- 
of  the  securities  received  in  excess  of  the  cost  of  fj£^tion* 
the  property  relinquished,  constitutes   taxable  in-  Transac- 

come.  tion  De- 

fined. 

"Replying  to  your  letter  of  the  28th  ultimo,  you  are 
informed — (i)  That  in  a  case  wherein  an  investment  com- 
pany purchases  one-third  interest  in  a  telephone  company 
paying  therefor  $40,000,  the  telephone  company  being 
reorganized,  and  as  a  result  of  the  reorganization  the  in- 
vestment company  surrenders  whatever  certificates  of 
ownership  it  has  in  the  old  company  and  receives  in  return 
$40,000  par  value  of  bonds  and  $40,000  par  value  of  stock 
of  the  reorganized  company,  the  bonds  having  a  ready 
market  value  of  par  and  the  stock  at  50%  of  par,  it  will  be 
held  that  this  constitutes  a  closed  and  complete  transaction 
in  that  the  old  stock  has  been  disposed  of  for  a  readily 
determinable  value,  namely,  $40,000  actual  value  of  bonds, 
and  $20,000  actual  value  of  stock.  Hence  the  investment 
company  at  this  point  has  realized  on  its  original  invest- 
ment a  profit  of  $20,000  which  will  be  returned  as  income  of 
the  year  in  which  the  transaction  was  closed.  (2)  After 
the  foregoing  transaction,  if  the  investment  company  sells 
the  bonds  for  $40,000  and  retains  the  stock  which  is  reason- 
ably worth  $20,000,  it  will  be  held  that  so  far  as  this  par- 
ticular transaction  is  concerned,  no  income  has  been  realized 
and  none  will  be  realized  until  the  stock  retained  has  been 
sold  or  disposed  of  for  a  price  or  value  greater  than  the 
$20,000  returnable  as  income  under  the  first  transaction. 
(3)  If  the  $20,000  of  stock  is  traded  for  bonds  in  another 
corporation  worth  $20,000,  no  taxable  income  will  result 
from  this  transaction  as  it  is  held  to  be  an  exchange  of 
assets  of  a  different  form  but  of  equal  value.  (4)  In  the 
sale  or  disposition  of  capital  assets,  a  closed  and  completed 
transaction  is  held  to  be  one  in  which  an  asset  is  disposed  of 


94  INCOME   TAX — LAW  AND  ACCOUNTING 

for  cash  or  for  assets  other  than  cash,  at  a  fixed  or  deter- 
mined value,  that  is,  for  cash  or  its  equivalent  in  value  at 
the  time  the  transaction  is  consummated.  If  the  assets 
are  exchanged  for  other  assets  of  a  like  character,  and  no 
account  is  taken  of  compensatory  value,  it  will  be  held  that 
such  a  transaction  constitutes  merely  a  change  in  the  form 
of  assets,  and  the  investment  will  be  considered  a  con- 
tinuing one,  no  profit  or  loss  to  be  taken  into  account  until 
the  assets  are  disposed  of  for  cash  or  its  equivalent  on  the 
basis  thereinbefore  indicated."  (Letter  to  F.  B.  Mac- 
Kinnon, Washington,  D.  C.,  signed  by  Acting  Commis- 
sioner David  A.  Gates  and  dated  August  3,  1917.) 

The  amount  received  by  a  corporation  for  the  original 
issue  and  sale  of  its  capital  stock  is  held  to  be  the  capital 
Premium      °f  *-he  corporation.    In  cases  where  the  stock,  as 
Sale  of         originally  issued,  is  sold  at  a  price  greater  or  less 
Capital         than  the  par  value,  neither  the  premium  nor  the 
Stock.          discount  will  be  taken  into  account  in  determin- 
ing the  net  income  of  the  corporation  for  the  year  in  which 
the  stock  is  sold.    This  is  purely  a  capital  transaction  and 
the  income  is  neither  increased  nor  decreased  by  reason  of  the 
sale,  per  se,  of  the  stock  at  a  price  greater  or  less  than  its 
par  value.    (T.  D.  2090.) 

A  real  estate  development  corporation,  ordinarily,  does  not 
realize  a  profit  until  the  property  or  properties  of  such  corn- 
Income  of  pany  have  been  developed.  During  the  time  of 
Real  Es-  such  development  certain  carrying  charges  are  in- 
vdopment  currec^>  as  interest,  taxes,  insurance,  etc.  Inasmuch 
Corpora-  as  it  would  work  an  injustice  to  compel  such  com- 
tion.  pany  to  deduct  carrying  charges  as  current  expenses 

during  the  period  of  development,  when  the  property  derives 
no  profit,  it  has  been  ruled  that  all  such  carrying  charges  may 
be  added  to  the  cost  of  the  property.  During  the  time  of  de- 
velopment the  income  from  the  sale  of  lots,  or  parcels,  may 
be  deducted  from  the  total  cost  of  land,  including  the  initial 
cost  plus  carrying  charges  and  the  corporation  will  return  no 
profit  until  the  amount  of  sales,  or  contracts  of  sales,  exceed 
the  prime  cost  of  property  plus  carrying  charges. 

In  the  case  of  a  contract  of  sale  of  land  on  the  instalment 
plan  of  payments  by  a  development  company,  the  gross  amount 


INCOME   OF  CORPORATIONS  95 

to  be  paid  by  the  instalment  purchaser  is  deemed  income  and 
is  returnable,  for  income  tax  purposes  in  the  year  that  the  con- 
tract of  sale  is  made.  Should  the  purchaser  default  in  payment, 
the  amount  of  such  default  may  be  deducted  as  a  loss  sustained 
by  reason  thereof. l 

The  cost  of  property  acquired  subsequent  to  the  in- 
cidence of  the  tax  will  be  the  actual  price  paid  for  it,  to- 
gether with  the  expense  incident  to  the  procurement  of  the 
property  in  the  first  instance  and  its  sale  thereafter,  and  the 
cost  of  improvements  or  developments,  if  any.  (T.  D.  2005.) 
T.  D.  2005  is  not  intended  to  be  so  construed  that  carrying 
charges,  if  they  consist  of  such  expenditures  as  constitute 
allowable  deductions  from  gross  income,  are  to  be  added 
to  the  cost  of  the  property  if  there  is  a  gross  income  from 
which  such  charges  as  constitute  allowable  deductions  may 
be  deducted.  It  is  intended,  however,  that  in  the  case  of  a 
holding  or  developing  company,  which  has  not  yet  reached 
the  stage  of  having  any  income  of  consequence  resulting 
from  its  corporate  operations,  the  carrying  charges  or  other 
excess  over  the  incidental  income  received  may  be  added  to 
and  made  a  part  of  the  cost  of  the  property.  (T.  D.  2137.) 

Regardless  of  the  form  or  manner  of  payment,  such  payment, 
received  in  a  sale  of  real  estate,  is  subject  to  income  tax  at  the 
time  the  sale  and  transfer  are  made;  that  is  to  say,  the  vendor 
corporation   accepting  in  payment,   promissory  notes,   mort- 
gages or  a  contract  providing  for  instalment  payments,  must 
report  the  profit  on  the  transaction  in  the  returns  for  the  year  in 
which  the  transaction  was  consummated.     Default  in  payment 
is  deductible  in  the  return  for  the  year  that  the  default  occurs. 
For  income  tax  purposes,  where  there  is  an  actual  sale 
and  transfer,  profit  will  be  considered  as  realized  even 
though  payment  is  to  be  made  in  instalments,  as  notes  for 
deferred  payments  are  secured  by  the  title  to  the  property, 
and  presumably  bear  interest  and  are  held  to  be  worth,  in 
cash,  their  face  value.    (T.  D.  2090.) 

1  Where  the  improvements  have  been  paid  for,  and  the  cost  per  lot  is 
determinable,  the  pro  rata  part  of  profit  on  instalments  received  may  be 
returned  for  each  year,  less  the  necessary  expenses.  For  example,  a  lot  plus 
improvements  cost  $250;  instalment  contract  of  sale  is  for  $500;  collections 
received  in  the  year,  $100;  then  the  profit  is  50%,  and  $50,  less  necessary 
expenses,  is  the  returnable  net  income. 


96  INCOME   TAX — LAW  AND  ACCOUNTING 

In  determining  the  amount  of  income  to  be  accounted  for 
on  this  basis  the  corporation  will  consider  mortgages, 
mortgage  notes,  or  any  other  credits  received  in  payment  of 
the  property  as  though  they  were  cash,  and  if  it  should 
occur  that  the  purchaser  of  any  of  the  property  should 
later  default  in  payment  the  corporation  will  be  entitled  to 
take  credit  as  a  loss  for  the  amount  of  loss  actually  sus- 
tained by  reason  of  the  default.  (T.  D.  2137.) 

In  case  of  default  on  instalment  payments  there  may  be 
charged  off  as  bad  debts  the  amount  of  such  unpaid  in- 
stallments less  the  salvage  value  of  the  real  estate  re- 
possessed. (T.  D.  2090.) 

A  very  complete  discussion  of  the  question  of  cost  of  real 
When  Cost  estate,  dealing  with  carrying  charges,  assessments 
of  Property  for  local  benefits,  etc.,  is  contained  in  a  letter  to 
Crying  the  Corporation  Trust  Co.,  signed  by  Commis- 
Charges,  sioner  W.  H.  Osborn,  dated  December  22,  1914, 
etc-  as  follows: 

"This  office  is  in  receipt  of  your  letter  of  the  i9th  instant, 
in  which,  referring  to  Treasury  Decision  No.  200$  [cost  of 
property  purchased  prior  to  the  incidence  of  the  special 
excise  tax  (January  i,  1909),  or  the  incidence  of  the  income 
tax  (March  i,  1913),  will  be  the  actual  price  paid  for  the 
property,  including  the  expense  incident  to  the  procurement 
of  the  property  in  the  first  instance  and  its  sale  thereafter, 
together  with  carrying  charges  of  interest,  insurance  and 
taxes  actually  paid  prior  to  the  incidence  of  tax  (special 
assessments,  if  any  'actually  paid'  as  'local  benefits'  in 
connection  with  real  estate) ;  provided  that  where,  up  to  the 
incidence  of  the  tax  the  expenses  of  carrying  property  has 
exceeded  the  income  from  it,  the  difference  between  the 
expense  of  carrying  and  the  income  from  the  property  shall 
be  added  to  the  purchase  price  and  the  sum  thus  ascer- 
tained shall  be  the  cost  of  the  property;  and  provided  fur- 
ther, that  in  the  case  of  property  purchased  prior  to  the 
incidence  of  the  tax  and  sale  thereof  subject  to  the  incidence 
of  the  tax,  there  shall  be  excluded  from  consideration  in 
ascertaining  cost  any  items  of  income,  expense,  interest 
and  taxes  previously  taken  into  account  in  preparing  a 
return  of  annual  net  income.  (T.  D.  2005.) "]  You  submit, 
for  a  ruling  of  this  office,  the  following  inquiries: 


INCOME  OF  CORPORATIONS  97 

"i.  Is  the  matter  in  parentheses,  beginning  in  line  6  of 
the  paragraph,  intended  to  mean  that  '  special  assessments, 
if  any,  actually  paid  as  local  benefits  in  connection  with  real 
estate '  may  be  added  to  the  original  cost  of  the  property  if 
such  assessments  are  paid  prior  to  the  incidence  of  the 
tax?" 

"2.  May  the  assessments  be  added  to  the  original  cost 
of  the  property  if  they  are  paid  subsequent  to  the  incidence 
of  the  tax?" 

"3.  Reading  the  paragraph  referred  to  from  line  i  to  the 
semi-colon  in  line  8,  it  appears  that  all  carrying  charges 
may  be  deducted.  This,  of  course,  is  modified  by  the 
proviso  beginning  in  line  8  and  ending  in  line  12,  which 
provides  that  if  the  expense  of  carrying  the  property  has 
exceeded  the  income,  the  difference  between  the  expense 
and  the  income  shall  be  added  to  the  purchase  price, 
and  the  sum  thus  ascertained  shall  be  the  cost  of  the 
property. 

"In  reply,  you  are  informed  that  special  assessments,  if 
any,  actually  paid  as  local  benefits  in  connection  with  real 
estate  are  held  to  be  expenditures  which  add  to  the  value 
of  the  property  and  should  be  capitalized,  whether  such 
expenditures  were  made  prior  to,  or  subsequent  to,  the 
incidence  of  the  tax;  that  is  to  say,  such  expenditures,  no 
matter  when  paid,  become,  in  effect,  a  part  of  the  cost  of 
the  property.  This  answers  your  first  and  second  inquiry. 

"Replying  to  your  third  inquiry,  you  are  informed  that 
all  carrying  charges  in  excess  of  the  income  which  may 
have  been  received  prior  to  the  sale  of  the  property  may  be 
included  as  a  part  of  the  cost  of  such  property,  and  the 
cost  thus  determined  will  be  excluded  from  the  gross  pro- 
ceeds of  the  sale  when  the  property  is  sold,  and  the  excess  of 
such  cost  will  be  returned  as  income. 

"This  ruling  is  based  upon  the  presumption  that  the 
corporation  is  doing  business,  and,  having  income  as  a 
result  of  the  business  done  must  use  such  income  to  offset,  in 
as  far  as  it  will  do  so,  the  expenses  necessary  to  the  opera- 
tion and  maintenance  of  the  business. 

"If  the  carrying  charges  are  less  than  the  income,  such 
carrying  charges,  unless  they  be  for  improvements  and 
betterments,  will  not  be  added  to  and  made  part  of  the 
cost  of  the  property,  but  will  be  deducted  from  the  gross 
income  received,  in  which  case  it  would  appear  that  the 


98  INCOME   TAX — LAW  AND   ACCOUNTING 

return  of  the  corporation  would  show  a  net  income  subject 
to  tax. 

"The  Treasury  Decision  referred  to  is  not  intended  to  be 
so  construed  that  the  carrying  charges,  if  they  consist  of 
such  expenditures  as  constitute  allowable  deductions  from 
gross  income,  are  to  be  added  to  the  cost  of  the  property, 
if  there  is  a  gross  income  from  which  such  charges  as  con- 
stitute allowable  deductions  may  be  deducted.  It  is  in- 
tended, however,  that  in  the  case  of  a  holding  or  developing 
company  which  has  not  yet  reached  the  stage  of  having 
any  income  of  consequence  resulting  from  its  corporate 
operations,  the  excess  of  the  carrying  charges  over  the 
incidental  income  received  may  be  added  to  and  made  a 
part  of  the  cost  of  the  property. 

"  As  a  general  proposition,  involving  the  acquirement  and 
holding  of  property  for  further  sale,  which  property  was 
acquired  prior  to  the  incidence  of  the  tax  and  from  which 
property  there  is  but  a  nominal  income,  insufficient  to 
meet  the  carrying  charges,  it  would  be  proper  to  add  to 
the  original  cost  of  the  property  the  carrying  charges 
of  interest,  insurance  and  taxes  actually  paid,  and  from 
that  amount  deduct  the  incidental  income  which  may 
have  been  received  between  the  date  of  purchase  and 
the  date  of  the  incidence  of  the  tax.  The  result  thus 
shown  will  be  the  cost  of  the  property,  or  the  amount 
to  be  excluded  from  the  proceeds  when  sale  is  made." 

Corporations  and  individuals  selling  merchandise  on  the 
instalment  plan,  or  on  "  lease  contracts,"  l  should  make 
Income  their  returns  of  gross  income  on  the  basis  of  the 
Businesses  S1"088  amount  of  contracts  of  sales  made  during  the 
Generally,  year.  In  other  words,  the  gross  amount  to  be  paid 
by  the  customer  under  a  contract  for  the  sale  or  "leasing"  of 
merchandise  is  construed  to  be  the  amount  on  which  the  gross 
profit  is  computed  for  income  tax  purposes.  Uncollectable  ac- 
counts, less  salvage  value  of  goods  returned,  if  any,  may  be 
charged  at  the  end  of  the  year  as  bad  debts.  This  principle  is 

1  Where  returns  are  made  only  of  cash  receipts,  the  proportion  of  profit 
on  each  instalment  received  may  be  returned  as  income.  For  example  a 
piano  sold  for  $400,  cost  $300,  the  gross  profit  is  25%.  If  $100  was  collected 
in  the  year,  25%  of  $100,  less  operating  expenses,  would  be  returnable. 
This  method  is  not  feasable  in  a  large  business. 


INCOME   OF  CORPORATIONS  QQ 

applicable  to  all  kinds  of  instalment  businesses,  making  returns 
on  the  accrual  basis. 

The  question  of  computing  the  profit  or  loss  from  the  sale 
of  timber  is  always  a  difficult  one.    As  in  the  case  of  other  prop- 
erties acquired  prior  to  March   i,   1913,   the  fair  Profit  or 
market  price  or  value  of  the  timber  should  be  deter-  i?s^ 
mined  as  of  that  date.    At  best,  such  values  must  Lumber 
be  more  or  less  estimated,  except  when  a  bona  fide  Stumpage. 
offer  of  purchase  for  cash  or  its  equivalent  had  been  received 
at  or  near  March  i,  1913. 

A  letter  dated  March  3,  1917,  signed  by  Deputy  Commis- 
sioner L.  F.  Speer,  published  by  the  Corporation  Trust  Co., 
outlines  with  marked  degree  of  clearness,  considering  the  com- 
plexity of  the  subject,  a  method  by  which  to  compute  the  profit 
or  loss  on  the  sale  of  timber  and  lumber,  as  follows: 

"In  compliance  with  your  request  of  the  ist  instant,  you 
are  advised  that  the  following  information  is  furnished  you 
in  regard  to  the  preparation  of  your  returns  of  annual  net 
income  under  the  provisions  of  the  Act  of  September  8, 
1916,  as  far  as  the  calculation  of  the  value  of  standing  timber 
as  of  March  i,  1913,  is  concerned,  and  it  also  represents  the 
regulations  of  this  office  in  regard  to  allowances  to  be  de- 
ducted from  gross  income  for  the  value  of  stumpage: 
Corporations  owning  timber  land  and  logging  off  the  timber 
and  manufacturing  it  into  lumber,  will,  if  the  timber  was 
acquired  prior  to  March  i,  1913,  be  permitted  to  exclude 
from  gross  income  either  through  a  deduction  from  gross 
receipts  or  through  a  charge  into  the  cost  of  manufacturing 
the  timber  into  lumber,  an  amount  equivalent  to  the  fair 
market  price  or  value  of  the  standing  timber  as  of  March  i, 
1913.  In  order  to  secure  the  benefit  of  this  deduction  such 
corporations  must  set  up  on  their  books  as  of  March  i, 
1913,  the  fair  market  price  en  bloc,  of  all  the  timber  then 
owned  by  them,  and  then  by  dividing  this  en  bloc  value  by 
the  estimated  number  of  feet  (board  measure)  in  the  entire 
timber  holdings,  the  per  unit  value  or  price  as  of  March  i, 
1913,  will  be  ascertained,  which  per  unit  price  or  value  will 
be  the  basis  for  measuring  the  amount  which  may  be  added 
to  the  cost  of  manufacture,  or  deducted  from  gross  income, 
until  the  en  bloc  value  of  the  entire  holdings  as  of  March  i, 
1913,  shall  have  been  extinguished,  after  which  no  further 


100  INCOME  TAX — LAW  AND  ACCOUNTING 

deduction  on  this  account  shall  be  allowed.  The  same  rule 
will  apply  in  the  case  of  timber  or  timber  lands  purchased 
subsequent  to  March  i,  1913,  the  only  difference  being  that 
actual  cost,  that  is  the  gross  purchase  price,  shall,  in  making 
the  computation,  be  substituted  for  en  bloc  price  or  value  as 
of  that  date.  If  the  entire  market  price  or  value  of  both 
timber  and  lands,  as  of  March  i,  1913,  or  the  entire  cost, 
if  acquired  subsequent  to  that  date,  is  extinguished  through 
a  deduction  from  gross  income  for  timber  used,  or  through  a 
per  unit  charge  to  cost  of  manufacturing  lumber,  then  the 
entire  amount  realized  from  the  logged-off  lands  or  for  other 
salvage,  will  be  returned  as  income  of  the  year  in  which  such 
lands  are  sold  or  disposed  of.  If  the  timber  or  timber 
lands  are  sold  en  bloc,  the  gain  or  loss  will  be  ascertained  on 
the  basis  of  the  difference  between  the  fair  market  price  or 
cost  and  the  selling  price,  accordingly  as  the  property  was 
acquired  prior  or  subsequent  to  March  i,  1913.  The  fair 
market  price  or  value  of  timber  or  timber  lands,  as  of 
March  i,  1913,  is  the  price  at  which  the  property  in  its 
then  condition  and  with  the  circumstances  then  surrounding 
it,  could  have  been  sold,  for  cash  or  its  equivalent.  This 
value  must  not  be  speculative,  but  must  be  determined 
without  taking  into  account  any  prospective  profits  that 
may  result  from  the  manufacture  of  the  timber  into  lumber. 
It  must  be,  as  the  law  contemplates,  a  fair  market  value, 
and,  once  determined,  must  be  set  up  on  the  books,  and,  as 
the  measure  of  a  stumpage  deduction  for  income  tax  pur- 
poses must  remain  constant  and  cannot  be  increased.  The 
value  so  set  up  as  of  March  i,  1913,  will  be  subject  to  the 
approval  of  the  Commissioner  of  Internal  Revenue.  You 
are  also  informed  that  this  office  is  not  prepared  to  express 
an  opinion  at  the  present  time  as  to  what  stumpage  value 
would  constitute  a  fair  value  of  short  leaf  North  Carolina 
pine  as  of  March  i,  1913,  and  in  regard  to  your  further 
request  you  are  informed  that  the  ruling  contained  in  the 
above  regulation  will  refer  equally  as  well  to  the  years  1913, 
1914  and  1915,  with  the  exception  that  the  cost  of  the  tim- 
ber shall  be  the  governing  basis  instead  of  its  value  as  of 
March  i,  1913." 

DEDUCTIONS  ALLOWED  CORPORATIONS 
"All  the  ordinary  and  necessary  expenses  paid  within  the 


DEDUCTIONS  ALLOWED  ' CORPORATIONS  IOI 

year  in  the  maintenance  and  operation  of  its  business  and 
properties"  are  deductible  from  gross  income  of 
corporations. 

All  losses  actually  sustained  and  charged  off  within  the 
year,  not  compensated  for  by  insurance  or  other-  Losses  De- 
wise,  are  deductible  items.  ductible. 

The  deduction  for  losses  must  be  losses  actually  sustained 
during  the  year  and  not  compensated  by  insurance  or 
otherwise.  It  must  be  based  upon  the  difference  between 
the  cost  value  and  salvage  value  of  property  or  assets, 
including  in  the  latter  value  such  amount,  if  any,  as  has, 
in  the  current  or  previous  years,  been  set  aside  and  deducted 
from  gross  income  by  way  of  depreciation.  (Art.  124, 

Reg.  33-) 

Deductions  for  losses  should  be  confined  to  losses  ac- 
tually sustained  and  charged  off  during  the  year,  and  not 
compensated  by  insurance  or  otherwise.  (Art.  158,  Reg.  33.) 

Losses  not  compensated  by  insurance  must  be  Loss  De- 
deducted  from  the  return  of  net  income  for  the  ductib.le 
year  in  which  the  loss  was  sustained.    This  ruling  year  Sus- 
has  been  upheld  by  the  courts  and  is  strictly  enforced,  tained. 

For  the  purpose  of  computing  the  profit  or  loss  p^gf  or 
from  the  sale  of  property  of  a  corporation,  acquired  Loss  on 
prior  to  the  incidence  of  the  law,  March  i,  1913,  Pr°P®rty 
such   properties  shall  be  valued  as  of  that    time  Before 
at  the  fair  market  price  thereof.    This  applies  to  March  1, 
both  real  and  personal  property.  1913> 

A  reasonable  allowance  for  the  exhaustion,  wear  and  tear 
of  physical  properties  of  a  corporation  arising  out  of  its  use 
or  employment  in  the  business  or  trade  is  deductible  Deprecia- 
in  the  year  that  such  depreciation  is  sustained,  tion  De- 
The  amount  deducted  must  be  actually  charged  ducti°le- 
off  upon  the  books  of  the  corporation.     (See  "Depreciation," 
page  175.)  Depletion 

(This  deduction  is  considered  in  Chapter  VI,  on  of  Oil  and 
Depreciation,  page  181.)  Gas  WeUs* 

Under  the  Act  of  September  8,  1916,  the  provision  of  the 
Income  Tax  Act  of  1913,  limiting  the  charge  for  depletion  of 


Iv^2  INCOME  T/X  -LAW  AND  ACCOUNTING 

mines  to  "  5  per  cent,  of  the  gross  value  at  the  mine  Depletion 
of  the  output  for  the  year"  has  been  repealed,  and  of  Mines, 
there  has  been  substituted  the  provision  that  a  reasonable 
allowance  for  depletion  thereof  will  be  permitted,  "not  to  ex- 
ceed the  market  value  in  the  mine  of  the  product  thereof,  which 
has  been  mined  and  sold  during  the  year  for  which  the  return 
and  computation  are  made"  under  rules  and  regulations  to 
be  prescribed  by  the  Secretary  of  the  Treasury. 

Inasmuch  as  the  operating  conditions  of  mines  are  so  ma- 
terially different,  the  rate  of  depletion  should  be  computed 
on  a  basis  that  will  provide  for  the  particular  requirements  of 
each  case. 

In  Grand  Rapids  &  Indiana  Railway  Co.  v.  Doyle,  Collector 
Mainten-  (United  States  District  Court  for  the  Western 
ance  De-  District  of  Michigan,  Southern  Division  l)  mainten- 
fined*  ance  was  defined  as  follows: 

"Maintenance  means  the  unkeep  or  preserving  of  the 
condition  of  the  property  to  be  operated  and  does  not  mean 
additions  to  the  equipment,  additions  to  the  property,  or 
improvements  of  former  condition  of  the  road." 

As  a  general  proposition  the  cost  of  renewals  in  like  kind 
and  quality  may  be  charged  off  as  expense.  Where  the  re- 
Renewals.  newal>  however,  is  also  an  improvement,  as,  for 
Improve-  example,  replacing  a  wooden  bridge  with  a  steel 
ments.  bridge,  wooden  doors  with  steel  doors,  a  motor 
of  twenty  horse-power  by  one  of  fifty  horse-power,  the  excess 
cost  would  not  be  allowable  as  a  deduction.  (T.  D.  2210.) 

The  income  tax  law  does  not  provide  specifically,  with  re- 
spect to  corporations,  for  the  deduction  of  bad  debts  or  un- 
B  d  D  bt  cou<ectible  accounts.  The  officers  of  the  Treasury 
Department;  however,  having  the  administration  of 
the  law  in  charge,  have  ruled  that  the  same  may  be  deducted 
as  losses.  (See  also  page  213.) 

To  provide  for  doubtful  and  anticipated  bad  debts,  by  es- 
Reserves  tablishing  a  reserve  for  that  purpose,  has  always 
for  Bad  been  considered  good  accounting  practice,  but  such 
Debts.  reserve  is  not  deductible  from  an  income  tax  re- 
turn. Accounts  receivable,  to  be  deductible  from  income, 

1T.   D.    2210. 


DEDUCTIONS  ALLOWED  CORPORATIONS  103 

must  actually  have  been  ascertained  to  be  worthless.  Besides, 
an  account,  to  be  deductible,  must  be  actually  written  off  in 
the  period  for  which  it  is  deducted. 

Amounts  added  to  reserve  funds  of  insurance  Reserve 
companies,  as  required  by  law,  are  deductible  from  Q^^^ 
a  return  of  net  income.  panics. 

Reserves  set  aside  for  contingencies,  or  so-called  "secret 
reserves"  are  not  deductible  from  returns  of  an-  Contingent 
nual  net  income.  Charging  capital  expenditures  and  Secret 
to  operating  expenses  is  specifically  prohibited.  Reserves. 

Items  held  in  suspense,  pending  an  event,  are  Suspense 
not  deductible  from  income  for  income  tax  purposes.    Items. 

Amounts  set  aside  out  of  profits,  or  reinvested,  for  the  pur- 
pose of  redeeming  outstanding  bonds  payable,  are  sinking 
not  deductible  from  taxable  income.    The  redemp-  Fund  Re- 
tion  of  bonds  is  a  capital  expenditure.  serves. 

Discounts  on  sales  of  commodities  dealt  in  are  only  deduct- 
ible to  the  amount  actually  allowed  to  customers.  Reserve  for 
A  reserve  for  cash  discounts,  the  establishment  of  Discounts 
which  is  approved  by  modern  accounting,  being  on  Sales- 
anticipatory  and  not  actual,  is  not  deductible  from  income. 

A  corporation  is  allowed  as  a  deduction  interest  paid  within 
the  year  on  such  an  amount  of  indebtedness  as  Interest 
does  not  exceed  the  sum  of:  Deductible. 

(a)  The  entire  amount  of  the  paid-up  capital  stock  out- 

standing at  the  close  of  the  year,  or  if  no  capital  stock, 
the  entire  amount  of  capital  employed  in  the  business 
at  the  close  of  the  year,  and 

(b)  One-half  of  its  interest-bearing  indebtedness  then  out- 

standing. 

This  subject  is  more  fully  dealt  with  on  page  202. 

Under  the  Income  Tax  Law,  as  amended  by  the  Interest 
War  Revenue  Act,  interest  paid  within  the  year  on  ^JJ^"1 
indebtedness  incurred  for  the  purchase  of  Liberty  Of  Liberty 
4  per  cent,  bonds  may  be  deducted  in  computing  4's. 
net  income  subject  to  income  surtaxes  and  excess-profits  taxes. 
In  case  of  corporations  this  is  subject  to  the  limitations  im- 
posed by  the  income  tax  law  on  the  amount  of  indebtedness, 
interest  on  which  may  be  deducted.    (T.  D.  2541.) 


IO4  INCOME  TAX — LAW  AND  ACCOUNTING 

The  interest  paid  during  the  year  on  indebtedness  wholly 
secured  by  collateral,  the  subject  of  sale  in  the  ordinary  business 
Interest  on  of  a  corporation,  joint-stock  company  or  associa- 
Indebted-  tion,  is  deductible  as  an  expense  of  doing  business. 
curecTby  Collateral,  which  may  be  the  subject  of  sale  in  the 
Collateral,  ordinary  business  of  a  company,  refers  to  commod- 
etc-  ities  in  which  the  company  deals.  Real  estate,  in 

this  sense,  could  only  be  the  subject  of  sale  in  the  case  of  a 
corporation  engaged  in  the  buying  and  selling  of  real  estate. 
This  applies  to  both  tangible  and  intangible  property  secured 
by  collateral,  but  limits  the  amount  of  indebtedness  on  which 
the  interest  may  be  computed  to  the  actual  value  of  such  prop- 
erty collateral. 

In  the  case  of  Anderson  v.  Forty-two  Broadway  Co.  (209 
Fed.  991  and  213  Fed.  777,  reversed  by  U.  S.  Sup.  Ct.,  Oct., 
1915)  (T.  D.  2261),  it  was  held  under  the  Corporation  Excise 
Tax,  that  a  real  estate  company  owning  and  operating  an 
office  building,  under  mortgage,  could  not  deduct  the  interest 
paid  on  such  mortgage  as  a  general  expense,  under  item  4  (a) 
(Form  1031)  but  only  in  item  6  (a),  which  made  it  subject  to 
the  limitation  of  law  as  to  deductibility  of  interest.  For  limita- 
tion of  deductible  interest  under  present  law  see  page  204. 

Interest  on  any  form  or  class  of  capital  stock  is  not  deductible 
Interest  on  ^rom  an  mcome  tax  return.  The  fact  that  pre- 
Pref erred  f erred  stock  is  "guaranteed"  or  cumulative  as  to 
Stock.  interest,  does  not  make  it  deductible. 

Interest  paid  on  outstanding  bonds  payable  of  a  corporation 
Interest  on  is  a  deductible  item.  Where  bonds  are  held  by 
Corpora-  trustees,  however,  for  the  benefit  of  the  issuing 
tion.  corporation,  interest  paid  thereon  is  not  deductible. 

In  the  case  of  a  corporation  selling  its  own  bonds  at  a 
discount,  the  amount  of  the  discount  should  be  prorated 
Amortiza-     over  ^e  u*fe  °f  ^e  Doncls  and  the  proportionate 
tion  of  Dis-  part  of  such  discount  applicable  to  each  year  during 
count  on      the  life  of  the  bonds,  constitutes  an  allowable  deduc- 
Bonds.          tjon  f rom  the  gj-oss  income  of  such  year.    The  deduc- 
tion from  gross  income  in  the  case  of  twenty  year  bonds, 
would  be  one-twentieth  of  the  aggregate  amount  of  the 
discount  on  the  bonds  sold.    (T.  D.  2137.) 


DEDUCTIONS  ALLOWED  CORPORATIONS  105 

Where,  however,  bonds  were  sold  at  a  discount  prior  to  the 
incidence  of  the  income  tax  law,  and  such  discount  had  been 
charged  off  on  the  books  of  the  corporation,  then  such  dis- 
count or  any  part  thereof,  shall  not  again  be  deducted  from 
the  gross  income. 

In  cases  where  bonds  are  purchased  at  a  premium,  such 
premium  may  be  prorated  over  the  remaining  life  of  Premium 
the  bonds,  so  that  only  the  redemption  value  thereof  on  Bonds 
appears  upon  the  books  when  the  bonds  mature.    Purchased. 

The  general   principles   as   to   the  deductibility  Loss  in 
of  premium  paid  in   the  retirement  of  corporate  Retirement 
bonds  are  as  follows :  of  Bonds' 

In  the  case  of  bonds  sold  by  the  corporation  at  par  and  re- 
deemed at  a  premium,  the  premium  paid  is  deductible  as  a 
loss  (i). 

If  the  bonds  were  sold  by  the  corporation  at  a  discount  and 
the  discount  had  been  charged  off  and  deducted  from  income 
then  the  premium  (purchase  price  in  excess  of  par)  may  be 
deducted.  [Any  part  of  the  discount,  however,  that  had  been 
charged  off  prior  to  the  incidence  of  the  Excise  Tax  (January  i, 
1909),  is  not  again  deductible  from  income.]  (2). 

If  the  discount  had  been  prorated  over  a  period  of  years  and 
at  the  time  of  redemption  all  the  discount  had  not  been  charged 
off,  then  the  difference  between  the  purchase  price  and  the 
selling  price  plus  the  discount  charged  off  may  be  deducted.  (3) 

If  the  bonds  were  sold  at  a  premium  and  the  premium  had 
been  reported  as  a  profit  in  an  income  tax  return,  then  the  pre- 
mium paid  in  the  redemption  would  be  deductible  as  a  loss  (4) . 

Example  (i): 

Bonds  redeemed  (purchased)  at $1,050 .  oo 

Sold  at 1,000 .  oo 

Would  permit  of  a  deductible  loss  of $    50 .  oo 

Example  (2): 

Bonds  purchased  at $1,050 .  oo 

Sold  at $   900.00 

Plus  discount  charged  to  Profit  and  Loss  Account..          100.00 


Par  Value 

Would  result  in  a  deductible  loss  of , 


106  INCOME  TAX— LAW  AND  ACCOUNTING 

Example  (3) : 

Bonds  purchased  at $1,050.00 

Sold  at $   900.00 

Plus  discount  prorated  and  charged  to  Profit  and 

Loss  Account . .  80 .  oo 


Selling  price  plus  prorated  discount 980 .  oo 

Would  permit  of  a  deductible  loss  of $     70.00 

Example  (4): 

Bonds  purchased  at $1,050 .  oo 

Sold  at $1,100 .  oo 

Less  premium  credited  to  Profit  and  Loss  Account 

and  returned  as  income 100.00 

$1,000  oo 

Would  permit  of  a  deductible  loss  of $     50.00 

In  Baldwin  Locomotive  Works  v.  McCoach  (221  Fed.  59) 
it  was  held  that  discount  allowed  in  the  sale  of  bonds  of  the 
Discount  issuing  corporation  is  not  an  expense  of  the  cor- 
on  Bonds,  poration  until  the  tune  of  maturity  of  the  bonds 
and,  therefore,  should  be  apportioned  or  prorated  over  the 
period  of  existence  of  the  bonds. 

In  the  case  of  a  corporation  selling  its  own  bonds  at  a 
discount  the  amount  of  the  discount  should  be  prorated  over 
the  life  of  the  bonds  and  the  proportionate  part  of  such 
discount  applicable  to  each  year  during  the  life  of  the  bonds, 
constitutes  an  allowable  deduction  from  the  gross  income  of 
such  year.  The  deduction  from  gross  income  in  the  case  of 
twenty-year  bonds  would  be  one-twentieth  of  the  aggregate 
amount  of  the  discount  on  the  bonds  sold.  (T.  D.  2137.) 

Where  the  discount  on  the  sale  of  bonds  had  been  charged 
Discount  off  on  the  books  of  account  prior  to  the  incidence 
Char0n<lS  of  the  Excise  Tax  (January  i,  1909)  such  discount 
off  Prior  to  cannot  be  deducted  from  the  taxable  income  of  a 
1909.  subsequent  year. 

Discount  on  bonds  issued  prior  to  the  year  1909,  if  such 
discount  was  charged  against  the  income  of  the  year  in 
which  the  bonds  were  sold,  is  held  not  to  be  deductible  from 


DEDUCTIONS  ALLOWED  CORPORATIONS  107 

the  income  of  subsequent  years,  for  the  reason  that  the 
charging  off  prior  to  January  i,  1909,  of  the  entire  amount 
of  the  discount  constitutes  a  closed  transaction,  and  such 
transaction  cannot  be  reopened  for  the  purpose  of  reducing 
the  taxable  income  of  a  corporation  by  deducting  there- 
from an  aliquot  part  of  the  discount.  (T.  D.  2137.) 

By  amendment  of  Treasury  Department  rulings  and  by 
Act  of  October  3,  1917,  premiums  paid  on  policies  of  insurance 
on  the  lives  of  partners  in  favor  of  a  partnership,  Premiums 
or  on  the  lives  of  officers  or  employees  in  favor  Life  In- 
of  corporations  are  not  now  deductible  as  expenses.  pJJUgJg 
Hereafter,  such  premiums  may  only  be  deducted  Corpora- 
from  the  gross  proceeds  of  the  policy,  when  re-  tions- 
ceived,  the  balance  being  returnable  as  income. 

In  cases  where  deductions  have  heretofore  been  made,  the 
total  premiums  paid  may  only  be  deducted  from  the  proceeds 
of  the  policy  to  the  extent  that  premiums  have  not  already 
been  deducted.  For  example: 

Amount  received  from  insurance  company  upon  policy $10,000.00 

Total  premiums  paid $8,000 .  oo 

Less,  premiums  deducted  from  income  tax  returns         500 .  oo 

7,500.00 

Returnable  as  income $  2,500 .  oo 

The  following  Treasury  Decision,  issued  August  30,  1917, 
with  respect  to  corporations,  is  also  applicable  to  partnerships: 

"To  Collectors  of  Internal  Revenue: 

"Treasury  Decision  2090  in  so  far  as  it  authorized  cor- 
porations to  deduct  from  gross  income  the  annual  premiums 
paid  on  policies  insuring  the  lives  of  officers  or  employees 
in  favor  of  such  corporations,  is  hereby  modified  to  the 
extent  that  instead  of  the  corporations,  carrying  such 
insurance,  being  permitted  to  deduct  from  gross  income  of 
the  year,  in  which  paid,  the  amount  of  the  annual  premium 
payments,  they  will  hereafter  be  permitted  to  deduct  from 
the  gross  proceeds,  when  received,  of  any  policies  of  which 
the  corporations  are  the  beneficiaries,  the  entire  amount  of 
the  premiums  paid  during  the  term  of  the  policies,  less  any 


108  INCOME   TAX — LAW  AND  ACCOUNTING 

premium  payments  which,  under  the  former  ruling,  have 
been  deducted  from  gross  income  in  any  return  of  annual 
net  income,  and  the  net  proceeds  of  the  policies,  thus  ascer- 
tained, will  be  returned  as  taxable  income  of  the  year  in 
which  received." 

W.  H.  OSBORN, 
Commissioner  of  Internal  Revenue. 

The  test  of  deductibility  of  bonuses,  as  gathered  from  several 
rulings  by  the  Department,  seems  to  rest  upon  the  question  of 
contractual  relation  of  employer  and  employee.  ^ 
It  is  not  essential  that  there  should  be  an  express 
contract  for  extra  compensation;  one  that  is  implied  by  the 
relations  of  the  parties  is  sufficient  to  establish  the  right  of 
deduction.  Additional  compensation,  for  example,  paid  to 
employees  as  extra  compensation  for  services  rendered,  is  a 
proper  deduction  from  gross  income  of  the  employer.  A  gra- 
tuity or  gift,  however,  for  which  no  service  has  been  rendered, 
such  as  Christmas  gifts  or  voluntary  contributions,  is  not  de- 
ductible. But  a  payment  by  an  employer  to  the  employee, 
irrespective  of  when  made,  during  the  holiday  or  any  other 
season  of  the  year,  in  consideration  of  services  rendered,  as 
extra  compensation,  is  deductible  in  the  return  of  the  employer. 
Such  compensation,  inclusive  of  the  regular  wages  and  the 
bonus,  must  be  a  reasonable  compensation  for  the  service 
rendered.  A  bonus  paid,  by  reason  of  a  prosperous  season,  is 
a  distribution  of  profits  and  not  deductible. 

Many  concerns  have  adopted  the  policy  of  paying  to  their 
employees,  at  regular  intervals,  sums  in  addition  to  their  fixed 
wages  or  salaries.  In  such  cases  the  employees  have  become 
accustomed  to  receiving  the  additional  remuneration,  look 
forward  to  and  reasonably  consider  it  as  a  part  of  their  com- 
pensation. Such  payments  are  deductible  as  expenses. 

This  subject  is  comprehensively  dealt  with  in  a  letter  of 
instructions  to  Collectors  issued  by  the  Office  of  the  Commis- 
sioner of  Internal  Revenue  in  January,  1916,  as  follows: 

"In  order  to  establish  uniformity  and  to  facilitate  the 
work  of  the  internal  revenue  officers  who  are  engaged  in  the 
examination  of  books  for  the  verification  of  the  returns  of 


DEDUCTIONS  ALLOWED  CORPORATIONS  1 09 

annual  net  income  made  pursuant  to  the  requirements  of 
the  Federal  income  tax  law,  you  are  informed  that  in  all 
cases  wherein  special  payments,  often  designated  as  bonuses, 
are  made  to  officers  or  employees  of  corporations  pursuant 
to  a  contract,  express  or  implied,  as  additional  compensa- 
tion for  services  rendered,  which  payments,  when  added  to 
the  stipulated  salaries,  do  not  exceed  a  reasonable  com- 
pensation for  the  services  rendered,  such  payments  may  be 
regarded  as  a  part  of  the  wage  or  hire  of  the  officer  or  em- 
ployee, and,  as  such  may  allowably  be  deducted  from  gross 
income  as  a  business  expense. 

"A  long-time  practice,  regularly  employed,  of  paying  to 
employees  certain  sums  in  addition  to  the  stipulated  salaries, 
constitutes  a  condition,  if  not  a  contract,  under  which  the 
employees  may  reasonably  expect,  for  the  greater  or  better 
service  which  they  render,  additional  pay,  and  if,  in  fact, 
such  payments  are  made  as  additional  compensation  for 
services  actually  rendered,  and  if  such  payments,  when 
added  to  the  stipulated  salaries,  do  not  exceed  a  reasonable 
compensation,  such  payments,  or  bonuses  may  be  treated 
as  an  'ordinary  and  necessary  expense  of  operation/  and, 
as  such,  deducted  from  gross  income. 

"This  ruling  contemplates  that  such  payments  are  condi- 
tioned upon  the  services  rendered  by  the  employees  and  not 
upon  the  earnings  of  the  corporation.  If  it  should  appear 
that  the  additional  or  special  payments  are  dependent  upon 
the  earnings  of  the  company,  rather  than  upon  the  services 
rendered,  or  if  such  payments  are  made  only  occasionally, 
and  then,  at  the  option  of  the  corporation  as  a  sort  of  thank 
offering  because  of  a  prosperous  year,  and  not  in  pursuance 
of  a  fixed  policy  or  practice,  or  any  contract,  express  or 
implied,  it  will  be  held  that  such  payments  are  gratuities 
and,  as  such,  are  not  properly  deductible  from  gross  income. 

"This  ruling  is  not  intended  to  authorize  in  any  case  the 
deduction  from  gross  income  of  amounts  paid  to  employees 
or  others  as  '  Christmas  gifts/  even  though  it  has  been  the 
practice  of  the  corporation  to  make  such  gifts.  These  are 
held  to  be  voluntary  contributions  or  donations,  and,  as 
such,  are  not  deductible. 

"In  determining  whether  or  not  the  special  payments 
above  referred  to  are  deductible,  internal  revenue  officers 
will  be  guided  by  the  facts  as  to  whether  or  not  such  pay- 
ments are  made  pursuant  to  a  contract,  express  or  implied, 


110  INCOME   TAX — LAW  AND  ACCOUNTING 

or  to  a  fixed  policy  or  practice,  and  whether  or  not  they 
represent  compensation  for  additional  or  more  efficient 
service  rendered,  and  whether  or  not  such  special  payments, 
when  added  to  the  stipulated  salary  or  wage,  exceed  a 
reasonable  compensation. 

"Amounts  paid  to  an  officer  or  employee,  who  is  a  stock- 
holder, in  excess  of  a  reasonable  compensation  for  his 
services,  will  be  treated  as  in  the  nature  of  dividends,  a 
return  upon  his  investment,  and  such  amounts  will  not  be 
deductible." 

Bonuses  that  are  deductible  in  the  return  of  the  employer 
must  be  included  in  the  return  of  the  recipient  employee  if  he 
is  required  to  make  a  return,  and  a  gift  or  gratuity  that  is  not 
deductible  in  the  return  of  the  employer  need  not  be  reported 
in  the  return  of  the  employee.  Gifts  are  not  taxable  as  income. 

Taxes  for  grading  of  property,  paving,  sewerage  and  similar 
Local  local  improvements  are  capital  expenditures  and 

Benefits.       not  deductible  from  income. 

Taxes  Paid  Taxes  paid  by  a  corporation  as  tenant  of  rented 
by  Tenant,  property  should  be  deducted  in  the  return  as  rent 
paid. 

A  corporation  continuing  to  pay  the  salary  of  an  employee 
Salaries  of  doing  duty  as  a  National  Guardsman  in  the  service 
Guards^  of  the  United  States  is  permitted  to  deduct  the 
men.  salary  paid  to  such  employee  in  its  return  of  annual 

net  income. 

Amounts  paid  to  retired  employees  or  to  their  families,  or 
Pensions  dependent  upon  them,  in  the  nature  of  pen- 

sions, are  deductible  from  gross  income  as  expenses. 

It  has  been  held  that  salesmen's  expenses  in  the  nature  of 
Salesmen's  entertainment  of  customers,  incurred  for  business 
Expenses,  purposes,  are  deductible  items. 

So-called  spending  or  treating  money  actually  advanced 
by  corporations  to  their  traveling  salesmen  as  a  part  of 
selling  expense  of  the  product  of  such  corporations  is  an 
allowable  deduction  in  a  return  of  income  by  such  corpora- 
tion. There  must  be  some  showing  that  all  the  allowance 
claimed  as  a  deduction  was  actually  expended  for  the  pur- 
pose for  which  the  allowance  was  made,  namely,  the  selling 
of  the  product  of  the  corporation  in  question.  (T.  D.  2090.) 


DEDUCTIONS  ALLOWED  CORPORATIONS  III 

Money  received  for  service  connections  and  pipe  ex- 
tensions are  not  permitted  to  be  deducted  from  Service 
the  gross  amount  of  the  income,  for  they  do  not  c.onnec- 
come  within  any  of  the  permitted  classes  of  de-  E^ 
ductions  mentioned  in  the  statute.    Moneys  so  Of  Water 
expended  are  invested  in  permanent  improve-  Company, 
ments,  which  tend  to  enhance  the  rental  and  the  market 
value  of  the  water  system.    (238  Fed.  329.) 

Payments,  under  contract,  by  public  utilities  to  State  or 
municipal  governments  for  privileges  or  franchises  Payments 

under  which  such  public  utilities  operate  are  nee-  toG°veni- 

i       i    i          i   e  ment  by 

essary  expenses  and  properly  deducted  from  gross  Public 

income.  Utility. 

In  case  of  a  public  utility  constructed,  operated,  or  main- 
tained under  contract  with  any  city  (State),  Territory,  or 
the  District  of  Columbia,  or  a  city  where  a  portion  of  the 
net  earnings  of  such  public  utility  is  payable  under  such 
contract  to  the  State,  Territory,  etc.,  the  amount  so  paid 
may  be  deducted  by  the  public  utility  operating  under 
such  contract  as  an  "expense  of  business."  (T.  D.  2090.) 

Losses  sustained  by  reason  of  defalcation  or  embezzlement 
are  deductible  items.    It  has  been  held,  however,  in  the  case 
of   United   States   v.   The   Cleveland,    Cincinnati,  Defalca- 
Chicago  and  St.  Louis  Railway  Co.,  decided  Feb-  ^^" 
ruary  23,  1916,  in  the  U.  S.  District  Court,  Southern  ment. 
District  of  Ohio,  that  such  losses  shall  be  deductible  only  in 
the  year  that  the  defalcation  or  embezzlement  occurs.    Should 
such  loss  or  losses  not  be  discovered  until  a  subsequent  year 
they  would  not  then  be  deductible.    "The  time  of  discovery 
of  a  loss  bears  no  relation  to  the  date  the  loss  was  sustained. 
The  loss  was  sustained  when  the  theft  occurred,  although  the 
defendant  did  not  know  at  the  time  of  the  depletion  of  its 
assets." 

The  organization  and  incorporation  expenses  of  new  enter- 
prises are  usually  charged  to  a  separate  account  in  the  ledger. 
Where   such   expenses   amount   to   a   considerable  Qrganiza- 
sum  it  has  not  been  unusual  to  prorate  the  same,  tion  Ex- 
as  expense,  over  a  period  of  years,  according  to  the  Penses- 


112  INCOME   TAX— LAW  AND  ACCOUNTING 

judgment  of  the  board  of  directors.  By  ruling  of  the  Depart- 
ment, the  deduction  of  such  "organization  expenses"  is  now 
prohibited.  It  is  held  that  such  payments  are  capital  expendi- 
tures of  such  character  as  not  to  be  subject  to  depreciation  or 
reduction  for  income  tax  purposes. 

"WASHINGTON,  D.  C.,  June  n,  1917. 
"  To  Collectors  of  Internal  Revenue: 

"Numerous  inquiries  have  been  made  of  this  office  with 
respect  to  the  treatment  by  corporations  in  their  returns 
of  annual  net  income  of  what  are  known  and  commonly 
designated  as  'organization  expenses' — that  is,  attorneys' 
and  accountants'  fees,  together  with  fees  paid  to  the  State 
authorities  prior  to,  or  coincident  with,  the  securing  of  a 
charter  and  the  incorporation  of  the  company. 

"In  the  absence  of  a  formal  and  definite  ruling  on  this 
question,  there  appears  to  have  been  some  conflict  in  the 
holdings  and  instructions  issued  by  this  office  in  regard  to 
this  matter.  Therefore,  in  order  to  make  definite  the  posi- 
tion of  the  bureau  and  to  promote  consistency,  it  is  held 
that  ' organization  expenses'  constitute  a  capital  invest- 
ment, such  expenses  being  offset  by  the  asset  value  of  the 
corporate  franchise,  an  intangible  asset  of  a  somewhat 
permanent  character  and  in  many  instances  of  substantial 
value.  Such  expenses  are  very  similar  in  character  to  the 
discount  at  which  the  stock  issued  by  the  company  is  being 
sold,  the  only  effect  of  such  expenses  and  discounts  being 
to  reduce  the  amount  of  capital  available  for  use  and  em- 
ployment in  the  business  of  the  corporation.  The  discount 
at  which  the  stock  is  sold  is  not  a  loss  sustained  within  the 
meaning  of  the  law,  and  therefore  not  deductible.  Likewise 
'organization  expenses' — that  is  to  say,  expenses  incident 
to  and  connected  with  the  incorporation  and  organization 
of  the  company — are  not  'ordinary  and  necessary  expenses 
of  maintenance  and  operation'  which  are  the  only  'ex- 
penses' authorized  by  the  income  tax  law  to  be  deducted 
from  gross  income. 

"Hence,  it  is  held  that  'organization  expenses'  do  not 
constitute  an  allowable  deduction  from  gross  income  of  any 
taxable  year,  nor  do  such  expenses  constitute  a  proper  item 
to  be  added  to  the  cost  of  any  physical  property  to  be  pro- 


DEDUCTIONS  ALLOWED  CORPORATIONS  113 

vided  for  through  the  authorized  annual  allowance  for 
depreciation. 

"W.  H.  OSBORN, 
"  Commissioner  of  Internal  Revenue.  " 

By  ruling  of  the  Department  it  has  been  held  that  lobbying 
expenses  and  campaign  contributions  are  not  de-  Lobbying 
ductible.     These,  at  any  rate,  are  illegal  expenses  ^^ 
and  would  not  be  apt  to  appear  upon  corporate  Expenses, 
books  of  account. 

Sums  of  money  expended  for  lobbying  purposes  and  con- 
tributions for  campaign  expenses  are  held  not  to  be  an 
ordinary  and  necessary  expense  in  operation  and  main- 
tenance of  the  business  of  a  corporation,  and  are,  therefore, 
not  deductible  from  gross  income  in  arriving  at  the  net 
income  upon  which  the  income  tax  is  computed.  (T.  D. 
2I37-) 

Additions  to  reserve  funds  of  insurance  companies,  as  re- 
quired by  law,  and  amounts  paid  on  policy  and  Deduc- 
annuity  contracts,  other  than  dividends,  are   de-  gu^ice" 
ductible  from  gross  income.    [Law,  Section  12  (a)  2.]  Companies. 

(a)  Under  item  5   (a)   (1916)  of  the  return  form,  the 
insurance  company  may  take  credit  for  all  losses  actually 
sustained  during  the  year  and  not  compensated  by  in- 
surance or  otherwise,  including  losses  resulting  from  the 
sale  or  maturity  of  securities  or  other  assets;  also  losses 
from  agency  balances,  or  other  accounts,  charged  off  as 
worthless;  losses  by  defalcation;  premium  notes  voided  by 
lapse,  when  such  notes  shall  have  been  included  in  gross 
income.    This  item  will  not,  however,  include  payments  on 
policy  contracts. 

(b)  In  this  item  may  be  deducted  actual  losses  sustained 
within  the  year  by  reason  of  the  depreciation  of  property, 
which  shall  have  been  so  entered  on  the  books  of  the  com- 
pany as  to  constitute  a  liability  against  its  assets.     An 
arbitrary  depreciation  deduction  claimed  in  the  return,  but 
not  evidenced  by  book  entry,  can  not  be  allowed. 

(c)  In  this  item  credit  will  be  taken  for  all  death,  dis- 
ability, or  other  policy  claims,  including  fire,  accident,  and 


1 14  INCOME   TAX — LAW  AND  ACCOUNTING 

liability  losses,  matured  endowments,  annuities,  payments 
on  instalment  policies,  surrender  values,  and  all  claims 
actually  paid  under  the  terms  of  policy  contracts.  Salvage 
need  not  be  included  in  gross  income  if  deducted  in  ascer- 
taining the  net  amount  paid  for  losses  under  policy  con- 
tracts. Reserves  covering  liabilities  for  losses  incurred, 
reported,  resisted,  adjusted  or  unadjusted  but  not  paid, 
can  not  be  deducted  from  gross  income  under  this  or  any 
other  item  of  the  return. 

(d)  The  reserve  funds  of  insurance  companies  to  be 
considered  in  computing  the  deductible  net  addition  to 
reserve  funds  are  held  to  include  only  the  reinsurance 
reserve  and  the  reserve  for  supplementary  contracts  re- 
quired by  law  in  the  case  of  life  insurance  companies,  the 
unearned  premium  reserves  required  by  law  in  the  case  of 
fire,  marine,  accident,  liability,  and  other  insurance  com- 
panies, and  only  such  other  reserves  as  are  specifically  re- 
quired by  the  statutes  of  a  State  within  which  the  company 
making  the  return  is  doing  business.  The  reserves  used  in 
computing  the  net  addition  must  not  include  the  reserve  on 
any  policies  the  premiums  on  which  have  not  been  ac- 
counted for  in  gross  income.  For  the  purpose  of  this  deduc- 
tion, the  net  addition  is  the  excess  of  the  reserve  at  the  end 
of  the  year  over  that  at  the  beginning  of  the  year  and  may 
be  based  upon  the  highest  authorized  reserve  required  by 
any  State  in  which  the  company  making  the  return  does 
business.  (Art.  147,  Reg.  33.) 

Domestic  and  foreign  assessment  insurance  companies  are 
Assess-  permitted  to  deduct  from  gross  income  amounts 
ment  In-  deposited  with  State  officers  as  additions  to  guar- 
Com-  antee  or  reserve  funds,  required  by  law.  [Law, 

panics.  Section  12  (c).] 

A  foreign  corporation  is  allowed  to  deduct:  All  ordinary 
Deduc-  and  necessary  expenses  actually  paid  within  the 
tions  Al-  United  States;  losses  actually  sustained  within  the 
Foreign  year  m  *ts  business  or  trade,  within  the  United 
Corpora-  States,  not  compensated  for  by  insurance,  or  other- 
tions.  wise;  also,  reasonable  allowance  for  depreciation 

and  depletion  of  properties  within  the  United  States. 

The  deductions  allowed  to  foreign  corporations  as  necessary 
expenses,  actual  losses,  depreciation  and  depletion,  are  the 


DEDUCTIONS  ALLOWED   CORPORATIONS  11$ 

same  as  those  allowed  to  a  domestic  corporation,  except  that 
only  such  expenses,  losses,  depreciation,  depletion,  etc.,  as 
occur  in  connection  with  the  business  of  such  foreign  corpora- 
tion within  the  United  States  are  allowed. 

The  provisions  with  respect  to  permanent  improvements, 
betterments  and  expense  of  restoring  property,  are  applicable 
to  foreign  corporations. 

The  amount  on  which  interest  is  allowed  to  foreign  corpora- 
tions shall  not  exceed  such  part  of  the  entire  paid-up  capital 
stock  outstanding  at  the  close  of  the  year,  and  one-half  of  its 
interest-bearing  indebtedness  then  outstanding,  "which  the 
gross  amount  of  its  income  for  the  year  from  business  transacted 
and  capital  invested  within  the  United  States  bears  to  the  gross 
amount  of  its  income  derived  from  all  sources  within  and  with- 
out the  United  States." 

Taxes  paid  by  a  foreign  corporation  within  the  United  States 
are  deductible,  excepting  income  taxes,  excess  profits  taxes 
and  those  assessed  against  local  benefits. 


CHAPTER  V 
WAR  EXCESS  PROFITS  TAX 

The  War  Excess  Profits  Tax  Law  purports  to  impose  a  tax 
upon  income  in  excess  of  normal  profits  as  measured  by  three 
War  prewar  years,  namely,  1911,  1912  and  1913,  with 

Adminis-*  Imitations  as  to  what  shall  constitute  "  normal 
tration.  profits."  In  its  very  essence,  however,  its  name 
is  a  misnomer;  it  is  essentially  not  a  "war  excess  profits  tax" 
because  its  effect  is  not  limited  to  war  or  exceptional  profits. 
Enterprises  that  were  prosperous  prior  to  the  war  are  never- 
theless taxed  to  the  same  extent  as  are  those  that  did  not  exist 
prior  to  the  war,  brought  about  by  reason  of  the  fixed  maximum 
allowance  in  lieu  of  prewar  income.  As  a  matter  of  fact  many 
old  established  concerns,  doing  a  prosperous  business  on  a 
comparatively  small  capital  are  discriminated  against  by  the 
limitation  of  deductions  based  upon  capital  as  defined  by  the 
law.  The  Act  must  be  looked  upon  as  an  exigency  of  the  Gov- 
ernment; although  in  some  respects  inequitable,  not  so  made 
by  design  of  its  makers,  but  by  reason  of  the  multiform  ramifica- 
tions of  business  and  capital  that  could  not  be  preconceived 
by  the  Legislators  in  the  time  within  which  the  measure  had  to 
be  prepared  and  enacted  in  order  to  render  it  applicable  to  in- 
comes of  the  year  1917.  The  Bill  contains  some  inconsistencies, 
which,  undoubtedly,  will  be  remedied  by  Congress,  but  the 
remedial  legislation,  it  is  believed,  cannot  now  be  made  effect- 
ive as  to  returns  for  the  year  1917.  The  best  that  can  be  hoped 
for,  for  the  present,  is  such  alleviatory  regulation  as  the  Treasury 
Department  may  have  power  to  grant  in  the  administration 
of  the  law  as  it  exists.  No  doubt  there  will  be  matters  in  respect 
of  which  administrative  regulation  will  be  ineffectual,  but, 
from  assurances  of  the  Commissioner  of  Internal  Revenue, 
unofficially  stated,  questions  arising  under  the  law  will  not  be 
dealt  with  in  a  narrow  way  but  in  a  broad  and  constructive 
way.  This  refers,  of  course,  only  to  matters  that  are  not  clearly 


WAR  EXCESS  PROFITS  TAX  117 

understandable,  or  questions  of  discrimination;  matters  that  are 
clear,  mandatory  and  without  ambiguity,  will  be  rigidly  enforced. 

All  individuals,  partnerships    and    corporations,  joint-stock 
companies  or  associations  and  insurance  companies  engaged 
in  trade  or  business,  professions  or  occupations  in  ^0  is 
the  United  States  (except  those  specifically  exempted  Subject  to 
by  law)  are  subject  to  the  Excess  Profits  Tax  upon  Tax- 
their  entire  net  income,  less  the  deductions  to  which  they  are 
respectively  entitled. 

Nonresident  aliens  and  nonresident  foreign  partnerships 
and  corporations  are  taxable  only  on  income  derived  from 
sources  within  the  United  States  but  without  any  exemption. 

The  tax  is  applicable  to  all  trades  and  businesses  of  whatever 
description,  whether  continuously  carried  on  or  not,  except: 

(a)  Compensation  of  officers  and  employees  of  the  United 
States,  or  any  State,  Territory,  or  the  District  of  Columbia, 
or  any  local  subdivision  thereof; 

(b)  Organizations  exempt  under  the  Income  Tax  Act  of 
September   8,  1916,  and  individuals  or  partnerships  coming 
within  the  same  description  or  doing  the  same  business; 

(c)  Income  from  the  business  of  life,  health  and  accident 
insurance  combined  in  one  policy  issued  on  the  weekly  premium 
payment  plan. 

By  statutory  provision  the  terms  "trade"  and  "business" 
include  professions  and  occupations,  and  by  ruling  of  the  Treas- 
ury Department,  employment  under  a  salary,  is  comprehended 
in  the  term  "occupation." 

Hence,  all  individuals,  partnerships  and  corporations  en- 
gaged in  any  trade  or  business,  profession  or  occupation,  in- 
cluding persons  compensated  by  salary,  are  subject  to  the 
Excess  Profits  Tax. 

The  exemption  of  certain  classes  of  associations  from  income 
taxes  and  excess  profits  taxes  applies  also  to  individuals,  part- 
nerships and   corporations  carrying  on   the   same  Exempt 
business  or  coming  within  the  same  description  as  Organiza- 
those  specifically  enumerated  in  the  Act  of  Sep-  tions- 
tember  8,  1916.    (See  page  84.) 

The  Excess  Profits  Tax  is  assessed  upon  the  net  income  as 
determined  for  income  tax  purposes,  less  a  deduction  of  an 


Il8  INCOME   TAX — LAW  AND  ACCOUNTING 

Principle      amount  for  normal  or  prewar  profits  (not  less  than 

durtion?6'  ^  or  more  t^lan  9  Per  cent>  °f  t^ie  mvested  capital), 
Exemp-*  and  an  exemption  of  $3,000  to  corporations  and 
tions.  $6,000  to  individuals  and  partnerships,  respec- 

Incidence     tivdy. 
of  Tax.  The  tax  is  effective  as  of  January  i,  1917. 

The  Excess  Profits  Tax  Law  is  contained  in  the  War  Revenue 
Act  of  October  3,  1917,  and  is  designated  therein  as  Title  II, 
D  .  comprising  Sections  200  to  214,  inclusive.  As  desig- 
nated by  its  title,  it  is  a  war  measure  but  not  neces- 
sarily limited  in  its  duration  to  the  time  that  the  war  lasts. 
According  to  the  proposed  War  Revenue  Bill  passed  by  the 
Senate  on  September  10,  1917  (not  acceptable  to  the  House), 
it  was  intended  that  the  "War  Income  Tax"  and  the  "War 
Profits  Tax,"  contained  therein,  should  only  be  additional  taxes 
upon  incomes  "during  the  present  war."  That  provision  was 
omitted  from  the  final  draft  of  the  measure  prepared  by  the 
Joint  Conference  Committee  of  the  Senate  and  the  House,  and, 
as  the  Act  finally  became  law  on  October  3,  1917,  no  reference 
was  made  therein  to  its  duration.  From  this  omission  one  may 
draw  the  conclusion  that  the  war  taxes  will  remain  operative 
until  after  the  close  of  the  present  war  and  so  long  as  the  Federal 
Government  requires  revenue  from  income  taxation  in  addition 
to  that  provided  for  in  the  Federal  Income  Tax  Law  enacted 
September  8,  1916,  now  effective. 

The  Excess  Profits  Tax  Law  of  March  3, 1917,  effective  against 
corporations  and  partnerships  only,  was  repealed  by  the  Act  of 
Old  Tax  October  3,  1917  (Section  214),  and  any  taxes  paid 
Repealed,  upon  assessments  made  under  the  requirements  of 
the  old  law  will  be  credited  on  assessments  under  the  new  law. 
If  no  assessment  results  under  the  present  law,  or  one  of  a  lesser 
amount  than  that  already  paid,  the  excess  payment  will  be 
refunded  as  a  tax  erroneously  or  illegally  collected  upon  applica- 
tion made,  as  provided  herein  on  page  17. 

The  Excess  Profits  Tax  as  applied  to  business  or  trade 
Rates  of  employing  capital  is  computed  on  the  net  income 
S^es  as  shown  by  the  income  tax  return  in  excess  of 

Capital  is  deductions  (prewar  allowance  and  exemption)  at 
Employed,  rates  as  follows: 


WAR  EXCESS  PROFITS  TAX 

20  per  cent,  of  the  amount  of  the  net  income  in  excess  of  the 

deduction  of  prewar  allowance  and  exemption,  and  not  in 

excess  of  15  per  cent,  of  the  invested  capital  for  the  taxable 

year; 
25  per  cent,  of  the  amount  of  the  net  income  in  excess  of  15  per 

cent,  and  not  in  excess  of  20  per  cent,  of  such  capital; 
35  per  cent,  of  the  amount  of  the  net  income  in  excess  of 

20  per  cent,  and  not  in  excess  of  25  per  cent,  of  such 

capital; 
45  per  cent,  of  the  amount  of  the  net  income  in  excess  of  25  per 

cent,  and  not  in  excess  of  33  per  cent,  of  such  capital ;  and 
60  per  cent,  of  the  amount  of  the  net  income  in  excess  of  33  per 

cent,  of  such  capital. 

The  method  of  computation  of  the  Excess  Profits  Tax  rates 
upon  the  net  income  could  also  be  stated  as  follows: 

Not  in  excess  of  15  per  cent,  of  the  capital  invested,  less 
the  deductions  of  7  per  cent.,  8  per  cent,  or  9  per  cent, 
of  the  invested  capital  (as  the  case  may  be),  plus 
$3,000  if  a  corporation  or  $6,000  if  an  individual  or 

partnership @  20  per  cent. 

15  to  20  per  cent,  of  capital  invested ©25    ' 

20  to  25  per  cent,  of  capital  invested @  35    ' 

25  to  33  per  cent,  of  capital  invested 

In  excess  of  33  per  cent,  of  capital  invested 


Individuals,  partnerships  and  corporations  engaged  in  busi- 
ness or  trade,  professions  or  occupations,  having  no  invested 
capital  or  not  more  than  a  nominal  capital  are  Rate  of 
subject  to  a  flat  excess  profits  tax  of  8  per  cent,  upon  j^^ai 
their  net  income  less  an  exemption  in  the  case  of  a  Capital, 
domestic  corporation  of  $3,000,  and,  in  the  case  of  a  domestic 
partnership  or  a  resident  or  citizen  of  the  United  States,  of 
$6,000. 

By  the  term  "taxable  year"  is  meant  the  calendar  year,  the 
twelve  months  ending  December  3ist,  except  that  in  case  a 
corporation  or  partnership  has  designated  its  own  Taxable 
fiscal  year  it  means  such  fiscal  year.    Inasmuch  as  Year- 
the  Excess  Profits  Tax  is  effective  as  of  January  i,  1917,  corpo- 
rations and  partnerships  using  their  own  fiscal  year  must  appor- 


120  INCOME  TAX — LAW  AND  ACCOUNTING 

tion  the  income  of  period  January  ist  to  the  end  of  the  fiscal 
year  in  1917.  The  tax  for  such  portion  of  the  fiscal  year  falling 
within  the  year  1917  will  be  the  proportion  which  the  time  from 
January  i,  1917,  to  the  end  of  the  fiscal  year  bears  to  the  entire 
fiscal  year.  For  example,  if  the  fiscal  year  ends  on  June  30,  1917, 
six  months  falling  in  the  year  1917,  the  Excess  Profits  Tax  will  be 
computed  on  six-twelfths  or  one-half  of  the  total  net  income  for 
the  fiscal  year.  In  such  case  the  exemption  of  $3,000  or  $6,000, 
respectively,  must  also  be  prorated  in  the  same  proportion. 

By  the  term  "prewar  period"  is  meant  the  calendar  years 
1911,  1912  and  1913.  If  a  partnership  or  corporation  was  not  in 
Prewar  existence  or  an  individual  was  not  engaged  in  busi- 
Period.  ness  or  trade  during  all  of  these  years  then  such  of 
them  as  the  partnership  or  corporation  was  in  existence  or  an 
individual  was  engaged  in  business  will  comprise  the  "prewar 
period."  The  wording  of  the  law,  namely,  "as  many  of  such 
years  during  the  whole  of  which  the  corporation  or  partnership 
was  in  existence  or  the  individual  was  engaged  in  the  trade  or 
business"  would  indicate  that  a  part  of  a  year  is  insufficient. 
Returns  of  The  Excess  Profits  Tax  returns  of  citizens, 

resident  aliens  and  domestic  corporations,  will,  in 
Resident  .     .  .  e     ' 

Aliens.          each  case,  respectively,  comprise  a  part  of  the  annual 

Domestic      return  of  net  income. 

Corpora-  Nonresident  alien  individuals  and  foreign  corpora- 
tions are  required  to  file  returns  of  income  from  all 
Returns  of  sources  within  the  United  States  regardless  of  amount 
Nonresi-  received  and  such  returns  will  provide,  as  a  compo- 
and  For- QS  nent  Part  thereof,  for  the  required  data  upon  which  the 
eign  Cor-  Excess  Profits  Tax  will  be  assessed.  No  tax  is  im- 
porations.  posed,  however,  if  the  net  income  is  less  than  $3,000. 

Domestic  partnerships,  which  are  not  required  to  make  re- 
turns of  net  income  under  the  Income  Tax  Act  of  September  8, 
Returns  of  1916,  or  the  War  Income  Tax  Law  of  October  3, 
pSner-°  IOI?>  unless  ordered  so  to  do  by  the  Commissioner  of 
ship.  Internal  Revenue,  must  make  returns  under  the 

Excess  Profits  Tax  Law  if  their  net  income  is  $6,000  or  more  for 
the  taxable  year. 

Foreign  partnerships  are  not  required  to  make  returns 
unless  their  net  income  from  sources  within  the  United 


WAR  EXCESS  PROFITS  TAX  121 

States,  during  the  taxable  year,  amounts  to  $3,000  Returns  of 
or  more.  Foreign 

The  requirements  of  the  Income  Tax  Law  as  e] 


to  due  date  of  filing  (March  ist),  and  as  to  exten-  Due  Date 
sions  of  time,  are  applicable  to  the  Excess  Profits  Tax.  of  Filing 

All  provisions  of  the  Income  Tax  Law  with  respect  Returns' 
to  penalties  for  failure  to  make  returns,  for  making  p      _ 
false  or  fraudulent  returns,  etc.,  are  made  applicable 
to  the  War  Excess  Profits  Tax. 

Excess  Profits  Taxes  imposed  upon  partnerships  xaxeg. 
should  be  apportioned  among  the  partners  accord-  Partner- 
ing to  their  respective  interests  and  deducted  from  shiPs- 
their  individual  income  tax  returns. 

Section  202  of  the  Excess  Profits  Tax  Law  provides  that  no 
tax  shall  be  imposed  in  the  case  of  a  foreign  partnership  the  net 
income  of  which  is  less  than  $3,000  during  the  Inequity 

taxable  year.    By  Section  211  it  is  required  that  all  J?  Case  of 
f      '  ^  •       i  ^  •  r  *  Foreign 

foreign  partnerships  having  a  net  income  of  $3,000  Partner- 

or  more  for  the  taxable  year,  shall  render  a  return  ship. 
for  such  year.   The  law  does  not  appear  to  provide  for  an  exemp- 
tion to  foreign  partnerships  earning  and  reporting  an  income  in 
excess  of  $3,000.    There  would  be  no  equity  in  taxing  a  partner- 
ship that  had  a  net  income  of  $3,100  and  allowing  another,  earn- 
ing $2,900  to  go  untaxed.    Besides,  this  method  is  not  in  conso- 
nance with  the  general  tenor  of  the  law.     This  inconsistency 
will  no  doubt  be  remedied  by  legislation  but  whether  that  can  be 
accomplished  to  become  effective  for  the  year  1917  is  problemati- 
cal.    Those  affected  by  the  inequality  should  inquire  Returns  of 
of  the  Commissioner  of  Internal  Revenue  as  to  what  Net  In- 
regulation,  if  any,  he  has  been  able  to  make  in  the   ™me  for 
premises.  PerioYand 

The  Department  will  require  returns  of  net  income  Taxable 
for  the  prewar  years  from  which  to  compute  and  verify  corpora- 
the  percentage  of  net  income  claimed  as  deductions  tions. 
based  on  invested  capital.1 

1  If  the  taxpayer  accepts  the  minimum  percentage  (7%)  by  which  to 
compute  the  deduction  for  the  taxable  year,  no  return  of  net  income  or  of 
invested  capital  for  the  prewar  year  will  be  required.  (T.  D.  2614,  Dec.  20, 
1917.)  See  page  172. 


122  INCOME    TAX — LAW  AND  ACCOUNTING 

The  net  income  of  corporations  for  the  prewar  period  and 
the  taxable  year,  shall  be  ascertained  and  returned  upon  the 
bases,  as  follows: 

For  ign  and  1912  l 

The  net  income  for  the  years  1911  and  1912  shall  be  returned 
for  the  calendar  years  on  the  basis  of  requirements  under  the 
Act  of  August  5,  1909,  except  that  Federal  income  taxes  paid 
within  the  year  shall  be  included. 

For  1913  2 

The  net  income  for  the  year  1913  shall  be  returned  for  the 
calendar  year  on  the  basis  of  requirements  under  the  Act  of 
October  3,  1913,  except  that  Federal  income  taxes  paid  within 
the  year  shall  be  included  and,  except  that  the  amounts  of 
dividends  received  upon  the  stock  or  from  the  net  earnings  of 
other  corporations,  subject  to  the  tax  applicable  to  1913,  shall 
be  deducted. 

For  the  Taxable  Year 

The  net  income  for  the  taxable  year  (1917  and  thereafter) 
shall  be  returned  on  the  basis  of  requirements  under  the  Act 
of  September  8,  1916,  as  amended  by  the  Act  of  October  3, 
1917,  except  that  the  amounts  of  dividends  received  upon  the 
stock  or  from  the  earnings  of  other  corporations,  subject  to 
the  income  tax,  shall  be  deducted. 

In  respect  of  the  returns  required  for  the  years  1911,  1912 
and  1913,  corporations  that  made  their  returns  for  the  calendar 
years,  can  use  the  substance  of  returns  that  were  filed  for  these 
years  except  that  Federal  income  taxes  paid  within  these  years 
should  not  be  deducted  from  income,  and  in  the  return  for  1913 
dividends  received  from  taxable  corporations  should  not  be 
included  as  income. 

Limited  partnerships  will  be  required  to  make  returns  under 
Limited  ^he  provisions  of  law  applicable  to  corporations 
Partner-  and  are  entitled  to  deductions  accorded  to  cor- 
ships.  porations. 

1  The  law  is  contained  in  Appendix,  page  305. 

2  The  law  is  contained  in  Appendix,  page  312. 


WAR  EXCESS  PROFITS  TAX  123 

The  net  income  of  partnerships  and  individuals  shall  be 
ascertained  and  returned  for  the  calendar  years  1911,  1912 
and     1913,    and    for    the    taxable    year,    upon    the    basis 
of  requirements  of  the  Act  of  September  8,  1916,  Net  In- 
as  amended,  except  that  dividends  received  upon  g>me  for 
the  stock   or  from  the  net  earnings  of   corpora-  Periodfand 
tions  which  were  taxable  upon  their  net  income,  Taxable 
shall  not  be  included  as  income.     Domestic  part- 
nerships  will  be  entitled  to  all  deductions  to  which 
citizens  or  residents  are,  by  law,  entitled,  and  for-  nerships. 
eign  partnerships  will  be  entitled  to  the  same  deductions  to 
which  non-resident  aliens  are  entitled. 

In  Senator  Simmons'  explanation  of  the  War  Revenue  Act 
before  the  Senate,  on  October  2,  1917,  he  defined  Occupation 
and  illustrated  the  word   "occupation"  as  includ-  Salary, 
ing  the  salary  of  a  corporate  officer,  in  language  as  follows: 

"I  think  that  the  president  of  a  corporation  is  engaged 
hi  an  occupation.  We  must  give  some  meaning  to  the  word 
'occupation'  as  used  in  the  bill.  If  it  means  no  more  than 
'trade'  or  'business'  there  would  be  no  reason  for  having 
included  it  in  the  bill.  It  seems  to  me  that  the  Treasury 
must  construe  the  bill — and  the  courts  will,  in  my  opinion, 
sustain  them,  as  meaning  that  all  salaries,  other  than  those 
of  employees  of  the  Government,  national,  State,  or  munic- 
ipal, are  liable  to  this  tax,  whether  it  be  the  salary  of  the 
president,  the  attorney,  the  doctor,  or  any  other  employee 
of  the  corporation,  subject,  of  course  to  the  flat  exemption  of 
$6,000." 

The  question  was  asked  Mr.  Kitchin  in  the  House  of  Repre- 
sentatives whether,  in  his  opinion,  a  person  who  Land, 
owns   several   thousand   acres   of   land,   which   he  owner, 
rents,  would  pay  an  excess  profits  tax.    Mr.  Kitchin's  l&come. 
answer  was: 

"There  is  some  doubt  as  to  this,  but  I  am  inclined  to 
believe  that  he  would  pay  an  excess  profits  tax.  He  would 
probably  be  construed  as  being  in  the  business  of  renting 
land." 

This  seems  to  be  a  logical  conclusion  and  no  doubt  the  De- 
partment will  so  rule.     Where,  however,  a  person  incidentally 


124  INCOME  TAX — LAW  AND  ACCOUNTING 

rents  a  farm  or  parcel  of  land  or  a  building,  and  such  renting  is 
not  his  business  or  part  of  his  business,  the  income  therefrom 
would  not  then  be  subject  to  the  excess  profits  tax. 

On  the  question  of  the  application  of  the  excess  profits  tax 
to  mines,  oil  wells  and  timber  lands,  an  interesting  explanation 
Mines,  Oil  was  made  in  the  House  of  Representatives  by 
Timber  Representative  Kitchin  bearing  particularly  upon 
Lands.  what  constitutes  profits  from  operations.  The 
principle  enunciated  can  be  applied  to  all  cases  where  natural 
resources  are  depleted  or  subjected  to  exhaustion. 

11  MR.  CAMPBELL  of  Kansas.  I  have  a  great  many  oil 
wells  and  coal  mines  in  my  district,  and  the  owners  of  the 
property  tell  me  that  when  they  are  taking  out  oil  or  coal 
they  are  exhausting  their  principal,  and  they  have  won- 
dered if  the  excess  profits  applied  to  them  when  they  are 
taking  out  their  product  and  exhausting  their  principal. 

"MR.  KITCHIN.  I  am  glad  the  gentleman  mentioned  that. 

"MR.  CAMPBELL  of  Kansas.  What  did  the  conferees  con- 
clude as  to  that? 

"MR.  KITCHIN.  We  did  not  take  care  of  that  proposition. 
Let  me  say  that  I  have  had  owners  of  oil  wells  and  of  coal 
and  zinc  mines  and  lumbermen  tell  me  that  each  day  in 
carrying  on  their  business  they  are  exhausting  their  capital 
and  ought  to  have  a  reduction  in  some  way  on  their  excess- 
profits  tax  on  this  account.  They  are  mistaken.  They  are 
not  exhausting  their  capital  each  day,  but  instead  they  are 
getting  their  capital  back  each  day.  For  instance,  suppose 
I  put  $100,000  into  standing  timber  costing,  say,  $5  a 
thousand  feet,  and  erect  a  sawmill  and  cut  it  into  lumber. 
Every  time  I  cut  a  thousand  feet  I  charge  that  $5  up  as 
cost  of  raw  material,  along  with  the  cost  of  labor  and  other 
expenses.  When  I  sell  that  thousand  feet  of  lumber  I  add 
the  cost  of  the  standing  timber,  labor  cost,  and  other  ex- 
penses to  the  price  for  which  sold.  Five  dollars  of  my 
principal  is  returned  to  me  with  a  profit  on  it  upon  the 
sale  of  each  thousand  feet.  Instead  of  exhausting  their 
capital  daily,  a  part  of  their  capital  is  each  day  being  re- 
turned to  them  to  be  again  invested. 

"MR.  CAMPBELL  of  Kansas.  But  is  it  a  profit? 

"MR.  KITCHIN.  They  get  their  capital  back  and  the 
profit,  too. 


WAR  EXCESS  PROFITS  TAX  125 

"  MR.  CAMPBELL  of  Kansas.  Is  it  a  profit  when  they  are 
taking  their  capital  out  of  the  mines? 

aMR.  KITCHIN.  For  instance,  a  man  puts  $300,000  into  a 
coal  mine,  and  the  coal  in  the  mine,  say,  stands  him  5  cents  a 
ton.  He  begins  to  mine  and  sell  the  coal.  In  the  price  of 
every  ton  he  sells  is  included  the  cost  of  the  coal  in  the  mine, 
the  cost  of  labor,  overhead  charges,  and  all  other  expense, 
and  his  profit.  On  every  ton  sold  he  gets  back  that  part 
of  his  capital  which  he  invested  in  or  paid  for  that  ton  of 
coal  at  the  mine. 

"  MR.  CAMPBELL  of  Kansas.  But  suppose  he  has  160 
acres  of  coal  land,  and  he  has  mined  all  of  that  160  acres, 
and  it  is  completely  exhausted? 

"MR.  KITCHIN.  He  has  got  his  entire  capital  back.  His 
mine  is  exhausted,  but  the  capital  he  put  into  it  has  been 
returned  to  him  from  time  to  time  as  he  mined  and  sold 
the  coal. 

"MR.  CAMPBELL  of  Kansas.  But  is  that  charged  to  him 
as  profits. 

"MR.  KITCHIN.  The  income  tax  law  and  this  bill  permit 
him  to  deduct  the  cost  of  that  coal,  in  getting  at  his  profits 
or  income  that  year  for  the  purpose  of  the  tax.  He  deducts 
that,  deducts  the  overhead  charges,  labor,  and  all  other 
expense  in  determining  the  profits  or  income  in  his  business. 

"MR.  CAMPBELL  of  Kansas.  Here  is  a  man  who  has  an 
oil  well  that  cost  him  $20,000.  Every  time  he  takes  20 
barrels  of  oil  out  of  that  well  he  exhausts  the  value  of  his 
investment,  does  he  not? 

"MR.  KITCHIN.  He  exhausts  that  much  of  the  oil  in  the 
well  and  the  well  is  worth  that  much  less,  but  instead  of  ex- 
hausting his  capital  put  into  it,  he  has  had  it  returned  to 
him  at  every  sale  of  a  barrel  of  oil  to  the  extent  of  the  cost 
to  him  of  the  oil  in  the  well.  Suppose  the  oil  in  which  his 
capital  was  invested  cost  him  at  the  rate  of  25  cents  a  barrel; 
every  barrel  he  takes  out,  when  he  sells  it,  he  gets  back  25 
cents  of  his  capital  that  he  has  put  in.  When  he  has  ex- 
hausted the  well  he  has  had  returned  to  him  the  $20,000  in 
the  price  he  received  for  the  oil.  Suppose  I  buy  standing 
timber  for  $100,000  and  the  next  day  I  sell  it  for  $150,000. 
I  have  sold  all  of  it  in  one  sale  and  got  my  capital  back  the 
next  day  and  $50,000  profit.  Suppose  I  cut  it  up  into 
lumber  and  sell  it  in  that  way,  taking  a  year  in  which  to  cut 
it;  each  day  I  cut  and  sell  I  get  part  of  my  capital  back. 


126  INCOME  TAX — LAW  AND  ACCOUNTING 

When  I  have  sold  it  all  I  have  all  my  capital  back  and  the 
profits  on  my  investment.  As  a  matter  of  justice  one  should 
not  have  a  deduction  on  the  whole  amount  of  original  capital 
when  in  the  nature  of  the  business  his  capital  is  from  time  to 
tune  returned  to  him  as  in  the  case  of  timber,  oil,  and  mining 
business,  and  such  returned  capital  should  not  be  used  as  a 
basis  of  deduction." 

(Congressional  Record,  October  16,  1917.) 

Income  Income  received  by  individuals  from  stocks  and 

From  In-      bonds,  held  as  investments,  is  not  subject  to  the 
vestments.    Excess  profits  Tax> 

This  exception  in  the  operation  of  the  tax  has  brought  forth 
a  great  deal  of  criticism.  The  unfairness  of  taxing  industry 
and  allowing  income  from  investments  in  securities  to  go  un- 
taxed  was  emphasized  in  the  Senate  on  October  2,  1917,  when 
the  present  law  was  under  consideration,  in  a  speech  by  Senator 
Wadsworth,  replied  to  by  Senator  Simmons.  Senator  Simmons* 
response  evinces  his  accord  in  the  arguments  presented  and 
indicates  that  time  did  not  permit  of  effecting  changes  in  which 
he  himself  concurred.  The  following  extracts  from  the  Con- 
gressional Record  of  October  16,  1917,  are  appended  merely  to 
show  that  in  the  preparation  of  the  Bill,  even  those  engaged  in 
its  making  were  not  permitted,  by  limitation  of  time,  to  cor- 
rect inequities  of  which  they  had  knowledge  and  to  bespeak 
impending  material  changes  in  the  principles  of  the  present 
income  and  excess  profits  taxes. 

"MR.  WADSWORTH.  I  do  "desire,  however,  to  take  this 
opportunity  to  say  that  section  209  emphasizes  very 
clearly,  I  think,  a  grave  injustice  which  is  done  by  our  tax 
laws,  an  injustice  inflicted,  comparatively  speaking,  upon 
the  man  who  earns  his  income  by  his  own  efforts  as  com- 
pared with  the  man  who  does  not  earn  his  income  at  all, 
but  merely  sits  at  a  desk  and  clips  coupons  or  cashes  div- 
idend checks.  The  man  who  is  so  fortunate  as  to  inherit  an 
invested  fortune,  as  we  all  know,  unless  he  is  otherwise 
minded,  may  sit  in  his  office  and  clip  the  coupons  and  cash 
the  dividend  checks  and  live  upon  the  proceeds  without 
being  of  any  particular  use  to  the  community.  In  fact,  he 
may  pass  his  whole  life  as  a  drone.  He  is  subject  to  the 


WAR  EXCESS  PROFITS  TAX  127 

individual  income  tax,  and  if  his  individual  income,  we  will 
say,  is  $10,000,  he  will  pay  according  to  the  rates  fixed 
in  this  bill  and  according  to  the  rates  fixed  in  the  statutes 
which  are  already  upon  the  statute  books. 

"Now  we  will  take  the  professional  man,  such  as  the 
physician  or  the  dentist  or  the  lawyer,  who,  by  his  own 
efforts,  extending  over  a  period  of  years  and  resultant  upon 
an  education  which  he  may  have  earned  for  himself  by 
working  his  way  through  a  medical  school  or  a  law  school, 
manages  to  reach  the  point  in  his  profession  where  he  earns 
$10,000  a  year.  He  pays  the  individual  income  tax  on  that 
$10,000,  and  then  this  bill  comes  along  and  assesses  him 
8  per  cent,  on  everything  over  $6,000  of  his  income  in 
addition  to  the  individual  income  tax  he  pays,  so  that  he 
is  penalized  because  he  is  a  worker.  If  he  had  not  earned 
the  $10,000  he  would  only  pay  an  individual  income  tax; 
but,  having  earned  it  by  his  own  efforts,  he  pays  more 
tax. 

"Of  course  I  realize  that  this  thing  can  not  be  straight- 
ened out  in  a  moment,  and  certainly  my  judgment  upon  it 
would  not  be  infallible,  nor  is  it  entirely  certain  that  my 
conclusions  are  clear;  but  let  me  say  to  the  Senator  from 
North  Carolina  and  to  other  Senators  who  have  been 
interested  in  this  question  of  taxation  that  sooner  or  later 
we  must  come  to  the  point  in  the  assessment  of  Federal 
taxes  against  individual  citizens,  whether  they  be  in  the 
form  of  individual  income  taxes  or  otherwise,  where  we 
shall  discriminate  between  the  earned  and  the  unearned 
incomes. 

"MR.  SIMMONS.  I  agree  with  the  Senator  absolutely 
in  that  proposition. 

"MR.  WADSWORTH.  I  called  attention  in  the  Sixty- 
fourth  Congress  to  the  fact  that  in  my  humble  judgment  the 
most  glaring  defect  in  our  imposition  of  the  individual 
income  tax  was  the  fact  that  it  made  no  distinction  be- 
tween the  drone  and  the  worker.  It  taxed  them  exactly 
alike.  This  bill  makes  the  condition  infinitely  worse.  It 
taxes  the  worker  infinitely  more  heavily  than  it  does  the 
drone. 

"I  know  it  is  too  late  to  cure  the  situation,  and  I  realize 
the  theory  on  which  the  committee  has  proceeded — that 
individuals  engaged  in  business  should  pay  a  profits  tax, 
whether  we  call  it  an  excess-profits  tax  or  a  war-profit  tax, 


128  INCOME   TAX— LAW  AND  ACCOUNTING 

just  as  a  partnership  or  a  corporation  engaged  in  business  is 
required  to  pay  such  a  tax;  but  we  still  leave  uncured  and 
uncorrected  the  injustice  done  in  the  income  tax. 

"MR.  SIMMONS.  I  want  to  state  to  the  Senator  that  the 
very  suggestion  he  is  making  now  was  made  to  the  com- 
mittee and  received  some  consideration;  but  we  considered 
that  the  matter  had  gone  too  far;  that  the  time  was  too 
short  for  us  to  undertake  to  change  the  method  of  taxation 
as  radically  as  his  suggestion  would  have  required. 

"MR.  WADSWORTH.  I  can  well  understand  that;  but  I 
want  to  take  this  opportunity  very  briefly  to  emphasize  that 
situation  to  the  Senate  in  the  hope  that  next  year,  or  per- 
haps the  year  after,  we  will  cure  this  situation,  for  it  does 
seem  to  me  to  be  a  grave  and  a  gross  injustice  to  inflict  a 
penalty  upon  industry  and  permit  the  drone,  as  I  have  used 
the  expression  before,  to  escape  merely  by  the  imposition 
of  one  tax." 

(Congressional  Record,  October  16,  1917.) 

By  "invested  capital"  is  meant  the  average  invested  capital 
for  the  year,  averaged  monthly,  except  that  the  average  in- 
Invested  vested  capital  for  the  taxable  year  is  exclusive 
Taxable0*  of  undivided  profits  earned  during  the  taxable 
Year.  year.  Hence,  the  invested  capital  for  the  taxable 

year  is  the  invested  capital  as  at  the  first  day  of  such  taxable 
year  plus  any  additional  capital  paid  in  during  the  taxable  year 
averaged  monthly. 

The  term  "invested  capital"  does  not  include  stocks,  bonds 
Exclusions  (other  than  obligations  of  the  United  States)  or 
vested11"  other  assets,  the  income  from  which  is  not  subject 
Capital.  to  the  excess  profits  tax,  nor  money  or  other  prop- 
erty borrowed. 

Liabilities  may  not  be  included  as  capital;  for  example: 
Invested  accounts  payable,  bills  payable  (notes),  bonds  pay- 
Capital  of  able,  or  loans  of  any  kind.1 

shj!?|j^"          Invested  capital,  in  the  case  of  partnerships  and 
Corpora-       corporations,  includes: 
tions.  (a)  Actual  cash  paid  in; 

1  Liabilities  are  a  deduction  from  the  assets  (computed  by  limitation  of 
law  as  to  tangible  and  intangible  property),  in  determining  surplus,  which 
latter,  by  law,  is  a  part  of  invested  capital. 


WAR  EXCESS   PROFITS  TAX  I2Q 

(b)  Actual  cash   value  of  tangible  property  paid  in  other 
than  cash  at  the  time  of  such  payment; 

(c)  Paid  in  or  earned  surplus  and  undivided  profit  used  or 
employed  in  the  business,  exclusive  of  undivided  profits  earned 
during  the  taxable  year. 

Tangible  property1  paid  in  other  than  cash  for  stock  or  shares 
in  a  corporation  or  partnership  may  be  included  as  invested 
capital  at  an  amount  not  in  excess  of  the  actual  value  of 
cash  value  thereof  at  the  time  of  such  payment.  Tangible 
In  case  such  tangible  property  was  paid  in  prior  pjjjjjjj 
to  January  i,  1914,  the  actual  cash  value  of  such  ships  or 
property  as  of  January  i,  1914,  may  be  included  Corpora- 
as  invested  capital,  but  in  no  case  shall  such  actual 
cash  value  exceed  the  par  value  of  the  original  stock  or  shares 
specifically  issued  therefor. 

The  value  at  which  patents  and  copyrights,  paid  for  by 
stock  or  shares  in  a  corporation  or  partnership,  may  patents, 
be  stated  as  invested  capital,  shall  not  exceed  the  Copyrights, 
actual  cash  value  thereof  at  the  time  of  such  pay-  5^°^" 
ment  and  shall  not  be  in  excess  of  the  par  value  of  Corpora- 
such  stock  or  shares  at  the  time  of  such  payment.  ^on' 

Invested  capital,  in  the  case  of  an  individual,  includes: 

(a)  Actual  cash  paid  into  the  trade  or  business;       Invested 

(b)  Actual  cash  value  of  tangible  property  paid  ^Jivid^ 
into  the  trade  or  business,  other  than  cash,  at  the  uals. 
time  of  such  payment,  except  when  the  tangible  property  was 
paid  in  prior  to  January  i,  1914,  the  actual  cash  value  of  such 
property  on  that  date  shall  be  stated  as  invested  capital. 

(c)  Actual  cash  value  of  patents,  copyrights,  good  will,  trade- 
marks, trade  brands,  franchises  or  other  intangible  property, 
not  to  exceed  the  actual  cash  value  of  the  tangible  Invested 

property  bona  fide  paid  therefor  at  the  time  of  such  Capital  of 

Foreign 
payment.  Corpora- 

In  the  case  of  a  foreign  corporation  or  partner-  tion  or 
ship  or  of  a  nonresident  alien  individual  the  term  ^J^3^' 
" invested   capital"   means  the  proportion  of  the  Nonresi- 
entire  invested    capital   as   defined   in  respect  of  dent  Alien, 
domestic  corporations  and  partnerships  and  citizens  or  resident 

1  For  definition  of  "tangible  property"  see  page  168. 


130  INCOME   TAX — LAW  AND  ACCOUNTING 

aliens,  which  the  net  income  from  source  within  the  United 
States  bears  to  the  entire  net  income  from  all  sources  within 
and  without  the  United  States. 

Capital,  surplus,  or  undivided  profits  (except  undivided 
BlbC(lty  I  Pr°fits  earned  during  the  taxable  year)  invested 
vested  "  ^  Liberty  Bonds,  or  any  other  obligations  of  the 
Capital  of  United  States,  by  corporations  and  partnerships, 
tions°and  w^  ^e  mc^u(^e(^  ^n  invested  capital  for  purposes 
Partner-  of  computing  deductions. 

ships.  "Investments  in  obligations  of  the  United  States, 

including  Liberty  Bonds  of  both  issues,  made  by  a  corporation 
or  partnership  from  capital,  surplus,  or  undivided  profits  will 
be  included  in  invested  capital  for  the  purpose  of  computing 
the  deduction  and  rate  of  taxation  under  the  Excess  Profits 
Tax  Law;  but  undivided  profits  earned  during  the  taxable  year 
can  not  be  included  in  invested  capital."  (T.  D.  2541.) 

The  books  of  account  of  a  trade  or  business  are  prima  facie  the 
best  guide  to  the  amount  of  capital  invested,  as  well  as  to  earn- 
Invested  ings,  and  are  assumed  to  reflect  the  facts  as  to  both. 
Books  of  ^e  book  accounts  entering  into  invested  capital, 
Account.  however,  are  not  conclusive  as  to  what  constitutes 
invested  capital  under  the  Excess  Profits  Tax  Law.  The  Gov- 
ernment has  the  right  to  go  back  of  the  books  of  account  in 
order  to  verify  the  facts  upon  which  the  invested  capital,  as 
reflected  by  the  books  of  account,  are  predicated.  The  fact  that 
an  asset  actually  exists  and  appears  upon  the  ledger  does  not 
necessarily  make  it  a  part  of  invested  capital;  to  be  so  included, 
it  must  conform  to  requirements  of  law  as  to  value  and  manner 
of  acquirement.  Conversely,  assets  may  exist  which  are  justly  a 
part  of  invested  capital  and  yet  do  not  appear  upon  the  books 
of  account.  The  real  facts  and  not  bookkeeping  facts  prevail  in 
the  valuation  of  assets  for  income  tax  purposes.  (U.  S.  v.  Guggen- 
heim Exploration  Co.,  238  Fed.  231;  Mitchell  Bros.  v.  Doyle,  225 
Fed.  437;  Baldwin  Locomotive  Works  v.  McCoach,  215  Fed.  967.) 

The  value  of  capital  stock  of  corporations  as  shown  by  "Capi- 
tal Stock  Tax  Returns,"  where  such  value  is  based  upon  the 
outstanding  capital  stock  plus  surplus,  as  shown  by  the  books 
of  account,  will  be  material  but  not  conclusive  as  to  invested 
capital;  where  the  value  of  capital  stock  is  declared  upon  the 
market  value  there  is  no  relevancy. 


WAR  EXCESS  PROFITS  TAX  13! 

In  the  ascertainment  of  invested  capital  of  corporations  the 
cost  of  property,  tangible  or  intangible,  is  of  predominant  im- 
portance. In  this  connection  it  is  worthy  of  note  that,  under 
the  Excess  Profits  Tax  Law,  tangible  property  acquired  by 
corporations  and  partnerships  prior  to  January  i,  1914,  shall  be 
stated  at  the  actual  value  as  of  that  date,  but  not  in  excess  of 
the  par  value  of  the  stock  or  shares  originally  issued  therefor; 
whereas,  in  the  case  of  individuals  the  value  of  tangible  property 
may  be  stated  at  the  value  as  of  January  i,  1914,  without  the 
limitation  as  to  cost.  This  inhibition  upon  corporations  and 
partnerships  (unless  the  Treasury  Department  interprets  the 
law  differently)  is  discriminatory  and  inequitable. 

As  a  matter  of  bookkeeping,  it  is  not  uncommon  for  pros- 
perous concerns  to  write  off  capital  assets  or  to  carry  them  on 
the  books  at  only  nominal  values.  Where  this  has  been  the 
policy,  it  is  suggested  that  the  assets  charged  off  or  arbitrarily 
written  down  be  reestablished  upon  the  books  of  account.  This 
must  be  done  consistently  and  with  due  regard  to  the  manner 
in  which  the  accounts  were  charged  off  or  reduced.  The  amounts 
reestablished  in  such  accounts  must  be  determined  in  strict  con- 
formity with  the  law  prescribed  as  to  tangible  and  intangible 
property.  But  whether  or  not  such  assets  are  reestablished  upon 
the  books  of  account  they  may,  nevertheless,  be  included  in 
invested  capital  if  the  conditions  as  to  their  acquirement  admit 
them  as  such  items  as  are  acceptable  under  the  law.  For  exam- 
ple, good  will  that  was  actually  purchased  in  the  year  1910  for 
say,  $100,000,  which  has  since  been  written  off  against  surplus 
may  be  included  in  the  assets,  provided  that  it  was  paid  for  in 
cash  or  property;  if  it  was  paid  for  in  stock,  then  at  the  amount 
so  paid  but  not  in  excess  of  20  per  cent,  of  the  total  capital  stock 
outstanding  on  March  3, 1917,  and  not  in  excess  of  the  par  value 
of  stock  issued  therefor;  provided,  in  either  case,  that  the  good 
will  exists  at  the  time  of  claiming  it  as  invested  capital  and  that 
the  corporation  is  then  the  owner  thereof.  In  the  case  of  trade- 
marks the  same  principles  would  be  applicable.  It  is,  of  course, 
assumed  that  no  part  of  the  amounts  written  off  on  the  accounts 
mentioned  was  deducted  in  the  ascertainment  of  income  for  tax 
purposes.  (Depreciation,  or  any  other  deduction  on  account  of 
good  will  or  trade-marks,  is  not  a  deductible  item.) 


132  INCOME   TAX — LAW  AND  ACCOUNTING 

In  the  case  of  tangible  property  having  been  arbitrarily 
written  off  by  a  corporation,  the  value  at  which  such  property 
may  be  reestablished  on  the  books  and  included  in  invested 
capital  shall  not  exceed,  if  paid  for  in  cash,  the  actual  cash  paid 
therefor;  if  paid  for  in  stock,  the  actual  cash  value  of  such  prop- 
erty paid  in  for  stock  at  the  time  of  such  payment,  not  in  excess 
of  the  par  value  of  such  stock  issued  therefor,  and  provided,  in 
either  case,  if  property  was  acquired  prior  to  January  i,  1914, 
that  the  cash  paid  or  cash  value  is  not  in  excess  of  the  actual 
cash  value  on  January  i,  1914.  Any  part  of  the  cost  of  prop- 
erty, so  determined  and  limited,  that  has  been  charged  off  as  de- 
preciation or  otherwise,  and  deducted  from  income  for  tax  pur- 
poses, is  no  longer  available  as  an  asset  to  the  amount  so 
charged  off.  The  depreciation  charged  off  is  evidence  of  a 
decrease  in  the  value  of  the  property  depreciated,  and  for  pur- 
poses of  invested  capital,  the  value  has  diminished  by  the 
amount  so  charged  and  deducted;  "you  cannot  both  eat  your 
cake  and  have  it."  If,  perchance,  depreciation  should  have 
been  deducted  in  excess  of  actual  depreciation  sustained,  the 
amount  deducted  in  excess  cannot  be  offset  except  by  stating 
the  amount  thereof  as  income,  which,  thereby,  is  made  subject 
to  income  taxes.  Where  an  amount  is  charged  off  in  excess  of 
the  cost  of  property,  such  excess,  by  rulings  of  the  Department, 
is  required  to  be  returned  as  income. 

In  a  case  where  property  was  arbitrarily  written  off,  in  part  or 
in  whole,  but  was  not  deducted  from  income  tax  returns,  the 
amount  reinstated  shall  not  exceed  the  difference  between  the 
actual  value  of  the  property  at  the  time  as  of  which  the  correcting 
entry  is  made  and  the  balance  at  which  it  was  carried  on  the 
books  at  such  time.  For  example,  if  property  purchased  in  the 
year  1905 

COSt $10,0000 

and  on  January  i,  1911,  there  had  been  charged  off  (not  deducted 

from  excise  tax  returns) $  9,000, 

it  would  appear  upon  the  books  on  January  i,  1911,  at $  1,000; 

Assuming  that  the  property  on  January  i,  191 1,  was  actually  worth    $  5,000, 
the  amount  that  may  be  reestablished  in  the  account  cannot  exceed 
the  difference  between  the  actual  value  as  of  that  time  and  the 
amount  at  which  it  was  then  carried  on  the  books,  namely $  4,000 


WAR  EXCESS  PROFITS  TAX  133 

Furthermore,  such  adjustments  must  be  made  to  affect  the 
invested  capital  of  prewar  years,  if  the  property  had  been  ac- 
quired prior  thereto  or  within  that  time,  and  not  alone  the  in- 
vested capital  of  taxable  years. 

The  amount  of  invested  capital  should  be  based  upon  actual 
values  of  property  as  at  the  tune  the  capital  is  computed,  sub- 
ject to  limitations  of  law  as  to  such  values. 

"Nominal  capital"  is  not  defined  in  the  law.     The  term 
is  uncertain  and  vague.     What  may  be  nominal  Nominal 
capital  in  one  case  may  be  real  in  another.  Capital. 

The  term  may  be  applied,  however,  with  a  reasonable  degree 
of  certainty,  to  particular  classes  of  taxpayers.  For  example, 
those  engaged  in  the  practice  of  a  profession,  such  as  lawyers, 
doctors,  dentists,  teachers,  architects,  engineers  and  clergymen, 
will,  undoubtedly,  be  classed  as  employing  a  nominal  capital 
or  not  more  than  a  nominal  capital.  A  chemist  or  druggist, 
although  engaged  in  a  profession,  usually  conducts  a  mercantile 
business  in  connection  therewith  and  employs  actual  capital. 
Where  such  capital  is  merely  incidental,  as  that  required  for 
experimental  purposes,  the  rate  of  tax  applicable  to  nominal 
capital  would  apply.  In  cases  where  a  profession  is  practiced 
only  as  an  incident  to  the  conduct  of  a  mercantile  or  other 
business,  however,  as  in  the  case  of  the  druggist  or  chemist,  an 
engineer  actually  engaged  in  construction  operations  and  fur- 
nishing capital  in  connection  therewith,  an  architect  doing  a 
building  business,  or  any  case  where  actual  capital  is  employed 
in  the  operation  of  such  business,  the  taxpayer  is  subject  to  the 
tax  imposed  on  those  employing  more  than  a  nominal  capital. 
Where  the  differentiating  line  is  to  be  drawn  is  a  difficult  prob- 
lem. Hard  and  fast  rules  are  practically  impossible  of  equitable 
administration. 

Representative  Kitchin  was  asked  a  question  in  the  House  of 
Representatives  bearing  upon  this  subject  by  Representative 
Dallinger,  as  follows: 

"MR.  DALLINGER.  Section  209  uses  the  words  'nominal 
capital.'  Suppose  a  family  is  incorporated  for  a  small 
amount  of  capital,  and  all  they  have  is  a  trade-mark  or  the 
good  will  of  certain  articles?  Suppose  they  could  sell  to-day 
that  trade-mark  for  half  a  million  dollars  and  they  are  only 


134  INCOME   TAX — LAW  AND  ACCOUNTING 

incorporated  for  $5,000?  Would  that  come  under  that 
section? 

"MR.  KITCHIN.  How  much  are  they  making? 

"MR.  DALLINGER.  Suppose  they  are  making  net  $100,000, 
and  are  only  capitalized  for  $5,000. 

"MR.  KITCHIN.  I  would  say  that  that  was  not  more  than 
a  nominal  capital  in  the  case  the  gentleman  puts,  and  the 
corporation  would  pay  under  section  209." 

Whether  Mr.  Kitchin's  reply  is  in  consonance  with  the  law  is 
questionable,  but  his  conclusion  seems  equitable.  Under  Sec- 
tion 207  (a)  of  the  law,  trade-marks  and  good  will  purchased 
prior  to  March  3,  1917,  shall  be  stated  at  an  amount  not  in 
excess  of  20  per  cent,  of  the  total  capital  stock  and  at  a  value 
not  to  exceed  "the  actual  cash  value  at  the  tune  of  such  pur- 
chase." On  the  other  hand,  the  trade-mark  or  good  will  in  the 
case  at  point  may  not  have  been  paid  for  at  its  "cash  value"  at 
the  time  of  its  acquirement  by  the  corporation.  The  corporation 
may  have  been  formed  only  as  a  convenience  to  the  members  of 
the  family,  the  stock  issued,  representing  only  relative  interests 
or  a  measure  of  proportionate  interests  in  property  apart  from 
the  value  of  the  property  itself  or  the  value  of  the  respective 
interests.  Close  corporations  by  reason  of  economy  of  main- 
tenance, are  not  uncommonly  so  capitalized.  It  may  be  said, 
therefore,  that  where  the  amount  of  capital  stock  is  only  nominal 
and  not  representative  of  the  actual  value  of  the  property 
possessed  by  a  corporation,  as  in  the  case  passed  upon  by 
Mr.  Kitchin,  either  the  flat  rate  of  8  per  cent,  shall  be  imposed, 
or,  the  parties  in  interest  may  request  that  the  corporation 
receive  the  benefit  of  a  deduction  based  on  the  returns  of  repre- 
sentative corporations  in  a  similar  business,  and  pay  the  tax 
upon  the  graduated  rates  prescribed  by  law — as  explained  in  the 
next  paragraph. 

Where  In-  In  cases  where  actual  capital  is  employed  by  an 
vested  individual,  partnership  or  a  corporation,  and  the 
Cannot  be  Secretary  of  the  Treasury  is  unable  satisfactorily 
Deter-  to  determine  the  amount  of  invested  capital,  the 
mined,  deduction  in  lieu  of  normal  or  prewar  profits  shall  be: 

The  same  proportion  of  the  net  income  for  the  taxable  year, 
which  the  average  deduction  for  the  calendar  year  of  representa- 


WAR  EXCESS  PROFITS  TAX  135 

tive  concerns  in  a  like  business  without  including  the  exemptions 
of  $6,000  and  $3,000,  bears  to  the  net  income  received  by  such 
representative  concerns.  For  example,  if  in  a  certain  line  of 
business  the  Treasury  Department  finds,  from  summary  com- 
putations made  from  returns  of  net  income,  the  following  facts: 

Aggregate  capital  invested  for  taxable  year $30,000,000 

Aggregate  net  profit  for  taxable  year 6,000,000 

The  net  profit  would  be  20  per  cent,  of  the  invested  capital.  The 
aggregate  amount  of  deductions  permitted  by  law,  however, 
being  limited  to  9  per  cent,  of  invested  capital,  would  be  only 
$2,700,000. 

Based  on  these  aggregate  computations  a  concern  in  a  similar 
business,  of  which  the  Secretary  of  the  Treasury  is  unable  to 
determine  the  invested  capital,  with  a  net  profit  of  $25,000 
would  be  entitled  to  a  deduction  in  lieu  of  prewar  profit  of 
$11,250,  computed  as  follows: 

$2,700,000     :    $6,000,000     :  :        ?         :    $25,000  = 

(2,700,000  x  25,000)   -T-  6,000,000  =   11,250 
or,  on  a  percentage  basis: 

9        :        20        :  :        ?        :        25,000  = 

(9  x  25,000)   -T-   20  =  $11,250 

In  addition  to  the  deduction  of  $11,250  such  concern  would  be 
entitled  to  the  specific  exemptions  of  $3,000  if  a  corporation,  and 
$6,000  if  an  individual  or  partnership. 

The  law  provides  that  the  proportions  between  the  deductions 
and  net  income  in  each  trade  or  business  shall  be  determined  by 
the  Commissioner  of  Internal  Revenue  in  accordance  with 
regulations  prescribed  by  him  and  approved  by  the  Secretary  of 
the  Treasury. 

In  case  of  the  change  of  ownership,  the  reorganization  or 
consolidation  of  a  trade  or  business  after  March  3,  1917,  if 
50  per  cent,  or  more  of  the  ownership  remains  in  partial 
the  control  of  the  same  persons,  corporations,  or  Change  of 
partnership,  or  any  of  them,  then  in  computing  Ownership, 
the  invested  capital,  the  assets  of  such  business  which  were 
transferred  or  received  shall  not  be  allowed  any  greater  value 
than  would  have  been  allowed  in  determining  the  invested 
capital  of  the  prior  trade  or  business  if  there  had  been  no  trans- 


136  INCOME   TAX — LAW  AND  ACCOUNTING 

fer,  unless  such  assets  were  paid  for  in  cash  or  tangible  property 
and  then  not  to  exceed  the  actual  cash  or  cash  value  of  the 
tangible  property  paid  therefor  at  the  time  of  payment.  (Law, 
Section  208.) 

Section  204  of  the  Excess  Profits  Tax  Law  states  that  a 
business  although  formally  organized  or  reorganized  on  or 
Reorgan-  after  January  2,  1913,  but  which  is  "substantially 
New^or-  a  continuation  of  a  trade  or  business  carried  on 
poration.  prior  to  that  date"  shall  be  deemed  to  have  been 
in  existence  before  that  time,  and  the  net  income  and  invested 
capital  of  the  predecessor  will  be  deemed  to  have  been  its  net 
income  and  invested  capital. 

The  question  as  to  what  constitutes  u  substantially  a  con- 
tinuation" is  one  that  can  only  be  answered  by  a  consideration 
of  the  facts  of  each  case.  These  facts  would  include:  questions 
of  continuity  of  parties  in  interest;  whether  the  same  kind  of 
business  was  continued;  at  the  same  location,  etc.  A  change 
in  the  amount  of  investment  would  not  alter  the  case  neces- 
sarily, because  this  is  only  used  relatively  in  computing  the 
percentage  of  prewar  profit. 

The  question  at  point  was  discussed  in  the  House  of  Repre- 
sentatives shortly  before  the  War  Revenue  Bill  was  voted  upon 
(October  i,  1917).  Representative  Kitchin,  Chairman  of  the 
Ways  and  Means  Committee,  was  explaining  the  terms  and 
operation  of  the  law  when  Representative  Cooper  of  Wisconsin 
presented  a  concrete  case  of  reorganization.  The  following  is 
taken  from  the  Congressional  Record  of  October  16,  1917: 

"  MR.  COOPER  of  Wisconsin.  The  character  of  the  Ex- 
cess Profits  Tax  is  somewhat  difficult  to  ascertain  from  a 
casual  reading  of  this  very  complicated  bill,  and  therefore 
I  ask  this  question,  which  has  been  submitted  in  perfect 
good  faith  by  a  very  excellent  gentleman:  A  corporation 
during  the  prewar  period  made  an  average  profit  of  $3 ,000  a 
year.  After  the  war  began  it  bought  out  a  competitor,  bor- 
rowed $75,000  in  money,  and  made  a  considerable  invest- 
ment in  new  buildings,  and  is  capitalized  for  $i  25,000.  This 
last  year  its  profits  were  $15,000.  Now  how  do  you,  under 
those  circumstances,  adjust  the  difference  between  the 
prewar  period  and  the  war  period? 


WAR  EXCESS   PROFITS   TAX  137 

"MR.  KITCHEN.  Does  the  gentleman  mean  that  the 
corporation  was  merged  or  reorganized  during  the  war? 

"MR.  COOPER  of  Wisconsin.  They  made  a  new  corpora- 
tion entirely. 

"MR.  KITCHEN.  There  is  a  provision  in  the  bill  to  take 
care  of  that.  Where  a  corporation  is  reorganized  with  prac- 
tically the  same  owners  it  is  considered,  so  far  as  the  percent- 
age of  deduction  is  concerned,  a  continuance  of  the  business. 

"MR.  COOPER  of  Wisconsin.  But  there  are  new  owners 
in  it. 

"  MR.  KITCHEN.  I  know,  but  there  are  also  the  old  owners 
in  it.  If  the  old  owners  succeed  to  the  new  business,  then 
they  take  the  percentage  that  they  had  before  the  war,  but 
if  it  is  discontinued  altogether,  if  the  old  owners  gave  up 
their  business  and  got  out,  and  an  entirely  new  corporation 
was  organized  since  the  prewar  period,  then  it  would  take 
an  8  per  cent,  deduction,  as  provided  in  the  bill  for  new 
companies  or  business. 

"MR.  GREEN  of  Iowa.  The  prewar  income  is  no  longer 
the  basis  of  taxation. 

"MR.  KITCHEN.  It  is  no  longer  the  basis  of  taxation,  but 
it  is  still  the  basis  of  the  deduction  in  a  much  more  limited 
extent  than  was  in  the  Senate  amendments.  There  still 
exists  a  differential  of  7  and  9  per  cent.  I  am  going  to  get 
to  that  and  explain  it  as  best  I  can. 

"MR.  COOPER  of  Wisconsin.  It  is  exceedingly  important 
in  the  case  of  this  particular  corporation,  because  for  this 
$75,000  of  new  capital  invested  they  gave  notes  payable 
monthly,  and  it  requires  a  profit  hi  order  to  meet  those 
notes  and  amortize  the  debt. 

"MR.  KITCHEN.  I  will  say  to  the  gentleman  that  if  there 
is  a  change  of  corporation,  company,  business,  or  ownership 
altogether,  then  it  is  a  new  company  that  was  not  in  exist- 
ence during  the  prewar  period,  and  it  would  take  the  8  per 
cent,  deduction  for  the  new  business.  That  is,  it  would 
have  an  8  per  cent,  deduction  upon  the  capital  invested  by 
the  new  company  plus  a  further  deduction  of  $3,000.  Then 
the  rate  of  taxation  would  apply  on  the  income  in  excess  of 
the  deduction. 

"MR.  COOPER  of  Wisconsin.  Eight  per  cent,  deduction 
on  the  capitalization. 

"MR.  KITCHEN.  On  the  invested  capital,  surplus,  and 
undivided  profits,  plus  $3,000. 


138  INCOME   TAX — LAW  AND  ACCOUNTING 

It  is  suggested  that  in  cases  presenting  special  questions 
such  as  that  cited,  a  ruling  thereon  be  obtained  from  the  Col- 
lector of  Internal  Revenue. 

An  essential  condition  to  the  inclusion  as  invested  capital 
of  good  will,  trade-marks,  or  franchise  of  a  corporation  or  part- 
Good  Will,  nership,  or  other  intangible  property  is  that  bona 
Marks  f^e  Payment  therefor  must  have  been  made  in 
Franchises,  cash  or  tangible  property  and  at  a  value  not  to 
exceed  the  actual  cash  or  cash  value  of  the  property  paid  there- 
for at  the  time  of  payment,  except: 

That  good  will,  trade-marks,  trade  brands,  franchise  of  a 
corporation  or  partnership,  or  other  intangible  property  pur- 
chased bona  fide  prior  to  March  3,  1917,  with  an  interest  or 
share  in  a  partnership  or  with  shares  of  capital  stock  of  a  cor- 
poration (issued  prior  to  March  3,  1917)  to  an  amount  not 
in  excess  of  20  per  cent.,  on  that  date,  of  the  total  interests  or 
shares  in  the  partnership  or  of  the  total  outstanding  capital 
stock  of  the  corporation,  may  be  included  in  invested  capital 
but  at  a  value  not  in  excess  of  the  actual  cash  value  at  the  time 
of  purchase  or  the  par  value  of  the  stock  issued  therefor. 

The  effect  of  the  limitation  upon  good  will,  trade-marks, 
trade  brands  and  franchises  paid  for  by  capital  stock  of  cor- 
porations, as  invested  capital,  is  that  the  stock  must  have 
been  issued  prior  to  March  3, 1917,  and  in  good  faith.  (March  3, 
1917,  is  the  date  of  the  enactment  of  the  first  Excess  Profits 
Tax  which  was  repealed  by  Act  of  October  3,  1917.)  Further- 
more, such  stock  may  be  included  as  invested  capital  only  up 
to  20  per  cent,  of  the  total  amount  of  capital  stock  of  the  cor- 
poration. Capital  stock  issued  since  March  3,  1917,  for  good 
will  or  intangible  property,  may  not  be  included  as  invested 
capital. 

A  clear  understanding  of  reserve  accounts,  how  they  are  created 
Reserve  and  their  respective  functions,  is  quite  necessary  in 
Reserve8'  order  to  determine  whether  or  not  a  particular  re- 
Funds,  serve  constitutes  a  part  of  the  invested  capital. 

A  reserve  account,  ordinarily,  is  established  by  a  charge  to 
Profit  and  Loss  Account l  and  a  corresponding  credit  to  the 

1  In  practice,  the  charge  is  first  made  to  an  account  designating  the 


WAR  EXCESS  PROFITS  TAX  139 

Reserve  Account.  The  charge  to  Profit  and  Loss  Account 
effects  a  reduction  of  the  profit  for  the  period  in  which  the 
reserve  is  created  or  added  to.  The  credit  to  the  Reserve  re- 
mains an  open  balance  either  as  a  negative  account  (reduction 
of  a  property  account)  or,  in  the  nature  of  a  reservation  of 
profits  or  surplus  for  particular  or  general  purposes.  For  ex- 
ample, the  amount  set  aside  as  a  reserve  for  depreciation  is, 
in  effect,  a  reduction  of  profits  and  a  corresponding  reduction 
of  the  book  value  of  the  property  depreciated.  The  same 
would  be  true  of  a  reserve  for  loss  on  investments,  reserve  for 
bad  debts  or  for  depletion  of  natural  resources.  All  of  these 
reserves,  in  their  creation  or  increase,  result  in  a  reduction  of 
profits  and  may  or  may  not  have  been  deducted  from  returns 
of  net  income  for  tax  purposes.  To  particularize,  reserves  for 
depreciation  and  depletion  are  deductible  and  the  reserves  for 
loss  in  investments  and  for  bad  debts  are  not  deductible.  In 
the  nature  of  them,  as  stated,  they  are  all  created  by  a  reduc- 
tion of  profits,  tantamount  to  expenses,  and  effect  reductions 
of  surplus.  On  the  other  hand,  a  reserve  set  aside  to  equalize 
dividends  or  a  reserve  for  amortization  of  bonds  payable  are 
not  expenses  and  do  not  affect  a  reduction  of  profits.  It  may 
be  stated,  therefore,  as  a  principle,  that  reserves  created  by  a 
reduction  of  profits  and  deducted  from  income  tax  returns,  do 
not  constitute  invested  capital.  Such  reserves,  so  called,  are 
merely  reductions  of  the  book  value  of  property  accounts  to 
which  they  relate.1 

Reserves  for  loss  on  investments  or  for  bad  debts,  not  being 
deductible  items  in  income  tax  returns,  were,  in  all  likelihood, 
set  aside  only  as  a  precautionary  measure,  to  equalize  profits, 
for  example,  or  for  some  similar  reason.  Such  reserves,  in  so 
far  as  they  do  not  represent  an  actual  reduction  of  the  book 
value  (value  at  which  an  asset  appears  upon  the  books  of  ac- 
count) of  the  assets  to  which  they  relate,  constitute,  hi  the 
author's  opinion,  invested  capital. 

nature  of  the  charge,  as  Depreciation,  Bad  Debts,  Depletion,  etc.  Such 
account  is  then  closed  into  Profit  and  Loss  Account. 

1 A  reduction  of  a  reserve  account,  where  the  latter  is  found  excessive, 
should  be  reported  as  income. 


140  INCOME  TAX — LAW  AND  ACCOUNTING 

To  illustrate: 

Reserve  for  Depreciation. 
Reserve  for  Depletion. 

These  are  negative  accounts  that  merely  effect  a  reduction 
of  the  book  value  of  the  property  accounts  which  they  qualify, 
and,  hence,  do  not  constitute  invested  capital. 

Reserve  for  Bad  Debts. 

Reserve  for  Loss  on  Investments. 

Although  the  amounts  credited  to  reserves  of  this  class  were 
charged  to  Profit  and  Loss  Account  and,  on  the  books  of  ac- 
count, effected  a  reduction  of  profits  or  surplus,  if  they  were 
not  deducted  from  income  tax  returns,  they  constitute,  in  the 
author's  opinion,  invested  capital  to  the  extent  that  they  are  not 
required  to  meet  the  purposes  for  which  they  were  created.  For 
example,  in  the  case  of  bad  debts: 

The  accounts  receivable  according  to  the  ledger  accounts 

amount  to $100,000 .  oo 

The  good  and  collectible  accounts  amount  to 98,000 .  oo 


Balance  represents  bad  debts $     2,000 .  oo 

If  there  was  an  accumulated  reserve  for  bad  debts  of $  10,000.00 


The  difference  would  represent  an  amount  reserved  in  excess  of 

requirements  and  would  constitute  invested  capital,  of. .     $    8,000.00 


Reserve  for  Amortization  of  Bonds  Payable. 
Reserve  for  Equalizing  Dividends. 
Reserve  for  Working  Capital. 

Reserves  of  this  category  would,  ordinarily,  be  created  by  a 
charge  to  Surplus  Account;  they  would  not  effect  a  reduction 
of  earnings,  and,  hence,  could  not  have  been  deducted  in  the 
ascertainment  of  net  income  for  tax  purposes.  These  reserves 
may  be  considered  as  in  the  nature  of  surplus  and  as  such  con- 
stitute invested  capital. 

A  reserve  fund,  or  more  properly,  a  Reserve  Fund  Invest- 
ment, is  an  investment  fund  created  by  reinvesting  or  setting 
aside  cash  or  its  equivalent.  The  establishment  of  such  invest- 


WAR   EXCESS  PROFITS  TAX  141 

ment  funds  does  not  in  any  way  affect  income  tax  returns. 
Hence,  reserve  fund  investments,  such  as  all  forms  of  sinking 
funds,  if  represented  by  specially  invested  funds  or  assets,  con- 
stitute invested  capital. 

Citizens  and  residents  of  the  United  States  and  domestic 
corporations   and   partnerships,   are   entitled   to  a  Deductions 

deduction  in  lieu  of  prewar  income  of  the  sum  of:       *?  Citizens, 

Residents, 
(i)  An  amount  equal   to   the  same  percentage  Domestic 

of  invested  capital  for  the  taxable  year  Corpora- 


the  average  amount  of  the  annual  net  income  of  ships. 
the  trade  or  business  during  the  prewar  period 

was 

of  the  invested  capital  for  the  prewar  period  —  but  not  less 
than  7  or  more  than  9  per  cent,  of  the  invested  capital  for  the 
taxable  year, 

plus 
(2)  $3,000  to  corporations, 

$6,000  to  citizens  or  residents, 
$6,000  to  partnerships. 

EXAMPLE 

A  corporation  had  an  invested  capital  during  the  prewar 
years  of,  respectively: 

IQII  ................................   $IOO,OOO 

IQI2  ................................    105,000 

1913  ................................    I  IO,OOO 


3)$3IS,000 

making  an  average  capital  for  the  prewar  years  of $105,000 


The  net  incomes  for  the  prewar  years  were: 

I911 $  10,250 

1912 16,000 

1913 21,000 

3)$  47,250 


making  an  average  net  income  for  the  prewar  years  of  .  .$15,750 


142  INCOME   TAX — LAW  AND   ACCOUNTING 

The  percentage  of  the  average  net  income  for  the  prewar 
years  was: 
$15,750  4-  $105,000  =  .15  =  15  percent. 

The  average  percentage  being  in  excess  of  9  per  cent.1  the 
corporation  is  entitled  to  the  maximum  deduction  allowed  by 
law,  namely,  9  per  cent. 

Assuming  that  for  the  taxable  year  the  corporation  had  an 

Invested  capital  of $200,000 

and  a  net  profit  of $  40,000 

it  would  be  entitled  to  a  deduction  of  9  per  cent,  of 

$200,000 $18,000 

an  exemption  of 3>ooo 

making  a  total  deduction  of $  21,000 

and  would  pay  an  excess  profits  tax  on $  19,000 

EXAMPLES — CORPORATION 

Assuming  that  a  business  has  an  invested  capital  for  the  tax- 
Method  of  able  year  of  $300,000;  that  the  net  income  subject 

Tfunn^ere  tO  excess  Pronts  tax  *s  $75>°°°>  that  tne  average  in- 
Capital  is  come  for  the  prewar  years  based  on  the  average 
Employed,  capital  for  the  years  1911,  1912  and  1913  is  8  per 
cent.,  the  tax  would  be  computed  as  follows: 

Net  Income  (25  %  of  invested  capital) $75,000.00 

Deductions: 

8%  of  $300,000 $24,000.00 

Exemption 3,000.00 


Total  Deductions 27,000.00 

Balance  subject  to  tax $48,000.00 

As  follows:    On  amount  not  in  excess  of 

15%  of  Capital $45,000.00 

Less  Deduction 27,000.00 


Not  in  excess  of  15%  of  Capital,  18,000.00  @  20%  $3,600.00 
15  to  20%  "  "  15,000.00  "  25%  3,750.00 
20  "  25%  "  "  15,000.00  "  35%  5,250.00 


Taxable  Amount $48,000.00 

Total  Tax $12,600.00 

1  If  the  average  percentage  is  between  7  and  9  per  cent,  the  exact  rate 
should  be  used  as  the  rate  of  deduction. 


WAR   EXCESS   PROFITS   TAX  143 

In  a  case  where  the  amount  of  the  deduction  exceeds  15  per  cent, 
of  the  invested  capital  the  excess  is  creditable  under  the  higher  rates 
and  the  tax  will  be  computed  as  follows: 

Assuming  that  a  corporation  has  an  invested  capital  for  the 
taxable  year  of  $30,000;  a  net  income  for  the  taxable  year  of 
$12,000;  and  an  average  prewar  profit  of  9  per  cent.,  the  tax 
would  be  computed  as  follows: 


Net  Income .  (40%  of  invested  capital) $12,000 .  oo 

Deductions: 

9%  of  $30,000 $2,700.00 

Exemption 3,000.00 

Total  Deduction 5>7oo .  oo 


Balance  subject  to  tax $  6,300 .  oo 

As  follows: 

Not  in  excess  of  15%  of  Capital,  $4,500.00 

Less  Deduction 5,700.00 


Balance None     @  20% . .  None 

15  to  20%  of  Capital $1,500.00 

Less  Deduction  in  excess  of 

15%  of  capital  (5,700  less  4,500)  $1,200.00 

Balance 300.00  ©25%$     75.00 

20  to  25%  of  Capital 1,500.00  "  35%       525.00 

25  "  33%  "        "     2,400.00  "  45%    1,080.00 

Over  33%  "        "     2,100.00  "  60%    1,260.00 


Taxable  Amount $6,300.00 


Total  Tax $  2,940.00 


EXAMPLES— INDIVIDUALS  AND  PARTNERSHIPS 

Assuming  that  an  individual  or  partnership  has  an  invested 
capital  for  the  taxable  year  of  $200,000;  a  net  income  subject 
to  excess  profits  tax  of  $60,000;  an  average  prewar  income  of 
9  per  cent.,  the  tax  would  be  computed  as  follows: 


144  INCOME  TAX — LAW  AND  ACCOUNTING 

Net  Income  (30%  of  invested  capital) $60,000.00 

Deduction: 

9%  of  $200,000 $18,000.00 

Exemption 6,000.00 


Total  Deduction 24,000.00 

Balance  subject  to  tax 36,000 .  oo 

As  follows: 

On  amount  not  in  excess  of 

15%  of  capital $30,000.00 

Less  Deduction 24,000.00 


Not  in  excess  of  15%  of  Capital,  6,000.00  @  20%  $1,200.00 

15  to  20%  "         "  10,000.00  "  25%    2,500.00 

20  "  25%  "        "  10,000.00  "  35%    3,500.00 

25  "  33%  "         "  10,000.00  "  45%    4,500.00 


Taxable  Amount $36,000.00 

Total  Tax $11,700.00 

Where  the  amount  of  the  deduction  is  greater  than  15  per  cent, 
of  the  invested  capital  and  cannot  all  be  allowed  under  the  first 
rate  (20  per  cent.)  the  remaining  portion  may  be  deducted  from  the 
amount  taxable  under  the  second ,  third,  fourth  or  fifth  rate,  as  the 
case  may  require. 

Assuming,  for  example,  that  an  individual  or  partnership  has 
an  invested  capital  for  the  taxable  year  of  $30,000;  a  net  income 
for  the  taxable  year  of  $12,000;  an  average  prewar  net  income 
of  9  per  cent.,  the  tax  will  be  computed  as  follows: 

Net  Income  (40%  of  invested  capital) $12,000.00 

Deduction: 

9%  of  $30,000 $2,700.00 

Exemption 6,000.00 


Total  Deduction $  8,700 .  oo 

Balance  subject  to  tax $  3,300.00 

As  follows: 

Not  in  excess  of  15%  of  Capital,  $4,500.00 

Less  Deduction 8,700.00 

Balance None     @  20% . .  None 


WAR  EXCESS  PROFITS  TAX  145 


15  to  20%  of  Capital $1,500.00 

Less,  Deduction  in  excess  of 

15%  of  Capital  (8,700  less 

4,5oo) 4,200.00 


Balance « None     @  25% . .  None 


20  to  25%  of  Capital $1,500.00 

Less,  Deduction  in  excess  of 

20%  of  Capital  (8,700  less 

6,000) 2,700 .  oo 


Balance None     ©35%.. None 


25  to  33%  of  Capital $2,400.00 

Less,  Deduction  in  excess  of 

25%  of  Capital  (8,700  less 

7,500) 1,200.00 


Balance $1,200.00  @  45%  $   540.00 

In  excess  of  33%  of  Capital. ..       2,100.00  @  60%    1,260.00 


Taxable  Amount $3,300.00 

Total  Tax..  $  1,800.00 


EXAMPLE — CORPORATIONS 

Net  Income $50,000 .  oo 

Nominal        Less  Exemption 3,000.00 

•Capital. 

Subject  to  Tax 47,000 .  oo 

Tax  @8% $  3,760.00 


EXAMPLE — INDIVIDUALS  AND  PARTNERSHIPS 

Net  Income $50,000 .  oo 

Less  Exemption 6,000.00 


Subject  to  Tax 44,000.00 

Tax  @  8% $  3,520.00 


146  INCOME   TAX — LAW  AND  ACCOUNTING 

Deductions  Foreign  corporations,  foreign  partnerships  and 
Co? °ora?n  nonresident  aliens  are  allowed  the  same  deductions 
tions  and  m  lieu  of  normal  or  prewar  profits  as  domestic 
Partner-  corporations  and  partnerships,  citizens  and  residents, 
Nonresid-  ^ut  are  not  aU°wed  any  specific  exemption  of 
ent  Aliens.  $6,000  or  $3,000. 

If  a  corporation  or  partnership  was  not  in  existence  or  an 
Corpora-  individual  was  not  engaged  in  the  trade  or  business 
Partner  during  the  whole  of  any  one  calendar  year  of  the 
ship  not  in  prewar  period,  the  deduction  allowed  shall  be  an 
Existence  amount  equal  to  8  per  cent,  of  the  invested  capital 
dividual  *or  tne  taxa^le  year,  plus  $3,000  in  the  case  of 
Not  in  domestic  corporations  and  $6,000  in  the  case  of 
Trade  in  domestic  partnerships  or  citizens  or  residents  of 
Period.  tne  United  States.  (Law,  Section  204.) 

Where  a  corporation,  partnership  or  individual 
Business  ^ad  no  net  mcome  during  the  prewar  period  or 
Yielded  no  where  the  percentage  of  income  of  the  invested 
Net  In-  capital  was  low  as  compared  with  that  of  representa- 
C^mpara-  tiye  concerns  in  a  like  business,  the  corporation, 
tivelyLow  partnership  or  individual  may,  upon  complaint  to 
Net  In§  b  ^e  Secretary  of  the  Treasury  obtain  a  deduction  of: 
normal  W  An  amount  equal  to  the  same  percentage  of  its 

Profits.  invested  capital  for  the  taxable  year  which  the  aver- 
age deduction  for  such  year  of  representative  concerns  in  a 
similar  business  is  of  their  average  invested  capital  for  such  year, 

plus 
(2)  $3,000  to  corporations, 

$6,000  to  citizens  or  residents, 

$6,000  to  partnerships. 

The  percentage  of  the  representative  concerns,  in  this  case, 
would  be  computed  as  prescribed  on  page  142,  illustrated  by 
example,  except  that  for  this  purpose  the  specific  exemption 
($3,000  or  $6,000)  would  not  be  deducted. 

The  effect  of  this  provision  is  that  those  who  were  in  business 
during  the  prewar  years  and  had  no  profit  or  had  a  low  per- 
centage of  profit  may  file  a  complaint  with  the  Secretary  of  the 
Treasury  and  claim  a  deduction  based  on  the  average  per- 


WAR  EXCESS  PROFITS   TAX  147 

centage  of  representative  concerns  in  a  like  or  similar  business. 
As  to  what  would  be  a  low  percentage  of  profit  is  a  question  for 
the  complainant  to  determine  from  his  knowledge  of  profits 
made  in  the  same  trade  or  business.  It  would  seem  reasonable, 
however,  that  any  concern  that  made  an  average  of  less  than 
9  per  cent,  would  have  a  right  to  file  such  complaint. 

The  percentage  which  the  net  income  was  of  the  invested 
capital  in  each  trade  or  business  can  only  be  fixed  by  the  Com- 
missioner of  Internal  Revenue. 

The  law  requires  that  returns  must  be  made  on  the  basis  of 
the  average  percentage  of  profit  of  the  respondent  as  outlined  on 
page   142    (illustrated  by  example)   and   that  the  How  to 
assessment  be  made  thereon,  but  at  the  time  of  2bta^i 
filing  such  return  a  claim  for  abatement  should  be  Deduction 
filed  of  the  amount  by  which  the  tax  so  assessed  Based  on 
exceeds  the  tax  computed  on  the  basis  of  representa- 
tive  concerns.    Inasmuch  as  the  Department  cannot  tative 
compute  the  average  percentage  of  net  income  of  Concerns, 
representative  concerns  until  it  has  received  the  returns  from 
which  to  make  the  computations,  it  will  be  necessary  for  those 
who  complain,  and  file  claims  for  abatement,  to  assume,  for 
the  purpose  of  deduction,  the  maximum  percentage  (9  per  cent.) 
and  to  prepare  a  return  on  that  basis,  such  return  to  accompany 
the  claim  for  abatement. 

Although  the  assessment  is  made  on  the  basis  of  the  return 
showing  the  actual  percentage  earned  (subject  to  provision 
of  law — 7  to  9  per  cent),  it  is  provided  that  the  amount  of 
the  claim  for  abatement  shall  not  be  paid  until  the  claim  is  de- 
cided, except  that  if,  in  the  judgment  of  the  Commissioner  of  In- 
ternal Revenue  the  interests  of  thejUnited  States  would  be  jeopar- 
dized by  the  delay,  he  may  require  the  claimant  to  furnish  a  bond 
for  the  amount  of  the  claim.  Upon  failure  to  furnish  satisfactory 
surety  within  such  time  as  the  Commissioner  may  prescribe  the 
full  amount  of  the  assessment  will  be  collected  at  once,  and,  when 
the  claim  has  been  passed  upon,  the  amount  found  to  be  due  to 
the  claimant,  if  any,  will  be  refunded  as  a  tax  erroneously  collected. 

Undoubtedly,  the  Treasury  Department  will  issue  a  special 
form  of  claim  for  abatement  which  will  be  obtainable  from  the 
Collectors  of  Internal  Revenue.1 

1  If  a  special  form  is  not  provided  Form  47  should  be  used. 


148  INCOME  TAX — LAW  AND  ACCOUNTING 

The  amount  of  tax  payable  before  the  claim  for  abatement  is 
decided  upon,  will  be  the  lesser  amount  as  shown  to  be  due 
according  to  the  return  in  which  the  deduction  is  based  upon 
the  average  income  of  representative  concerns;  in  other  words, 
the  amount  of  the  assessment,  less  the  claim  for  abatement. 

A  strict  interpretation  of  the  provisions  of  the  Excess  Profits 
Tax  Law  with  reference  to  returns  to  be  made  by  partnerships 
Salaries  of  would  indicate  that  in  the  matter  of  deductions, 
wh^n  De-  partnerships  are  entitled  only  to  such  deductions  as 
ductible.  are  applicable  to  individuals.1  That,  also,  seemed  to 
be  the  opinion  of  Congress  at  the  time  the  Act  was  under  con- 
sideration and  is  confirmed  by  a  statement  by  Senator  Simmons, 
Chairman  of  the  Finance  Committee  of  the  Senate,  made  just 
prior  to  the  final  vote  and  passage  of  the  Act  by  the  Senate  in 
reply  to  a  question  by  Senator  Calder.  The  question  was, 
"Why  should  individuals  receive  a  larger  exemption  than  cor- 
porations? "  Senator  Simmons  stated,  as  one  of  the  reasons,  that 
corporations  have  the  right  to  deduct  salaries  of  officers  and 
managers,  whereas,  individuals  and  partnerships  have  not  that 
right.  The  following  is  an  extract  from  the  Senator's  speech  of 
October  2,  1917,  as  contained  in  the  Congressional  Record  of 
October  16,  1917: 

The  Senator  also  inquires  why  we  maue  this  differentia- 
tion in  the  exemptions  in  favor  of  individuals  and  partner- 
ships. We  did  it  for  the  reason  that  the  corporation  has  the 
privilege,  which  it  always  exercises,  of  paying  its  officers 
and  managers  salaries  and  deducting  from  the  earnings  of 
the  corporation  the  amounts  so  paid  as  a  part  of  the  ex- 
penses of  the  business.  In  the  law  as  it  is  written  the  mem- 
bers of  partnerships  or  individuals  can  not  allow  themselves 
compensation  for  their  personal  services,  so  that  if  the 
Senator  and  I  were  operating  as  a  corporation  we  could  pay 
ourselves  a  salary  out  of  the  earnings  of  that  corporation 
and  deduct  it,  giving  in  our  income  tax;  but  if  we  were 
operating  as  partners  we  would  not  be  entitled  under  the 
law  to  pay  ourselves  salaries  and  have  the  amount  de- 
ducted. Such  a  course  would  be  inconsistent  with  the 
whole  income  tax  scheme  with  reference  to  partnerships, 

1 A  salary  allowance  is  made  to  partnerships  and  individuals  by  T.  D.  2611 
(Dec.  20,  1917).  See  page  169. 


WAR  EXCESS  PROFITS  TAX  149 

because  a  partnership  does  not  have  to  pay  any  income  tax, 
as  a  corporation  does.  Under  the  law  all  of  its  earnings  are 
regarded  as  distributed,  whether  actually  distributed  or 
not.  Though  they  may  be  retained  in  the  business,  the 
law,  when  it  goes  to  impose  the  income  tax  upon  the  part- 
ners regards  the  total  earnings  of  the  year  as  having  come 
into  their  hands,  and  requires  them  to  give  in  those  earnings 
for  taxation.  The  same  is  true  with  respect  to  the  individ- 
ual. The  partner  stands  exactly  in  the  position  of  the  indi- 
vidual. Neither  is  permitted  to  allow  himself  a  salary  and 
deduct  it,  and  if  he  were  permitted  to  allow  a  salary  for  per- 
sonal service,  and  deduct  it  in  ascertaining  his  excess-profits 
tax,  he  would  have  to  give  the  amount  so  allowed  in  for  in- 
come tax,  and  the  thing  would  be  as  broad  as  it  is  long." 

Except  for  the  last  sentence  of  Senator  Simmons*  statement 
the  prohibition  upon  the  deductibility  of  salaries  to  partners,  in 
his  opinion,  would  be  unmistakable.  His  concluding  remark, 
however,  that  inasmuch  as  the  partners  receiving  salaries  must 
return  them  under  the  Excess  Profits  Tax  Law  would  effect  the 
same  result  and  make  it  "as  broad  as  it  is  long"  lends  a  degree 
of  favor  to  the  view  that  such  salaries  are  deductible. 

Heretofore,  under  the  Act  of  September  8,  1916,  the  Treasury 
Department  has  held  that  salaries  paid  to  partners  were  subject 
to  withholding  at  the  source,  thereby  recognizing  the  deduc- 
tibility of  such  payments.  Under  the  Excess  Profits  Tax  Law  of 
March  3,  1917  (now  repealed),  it  was  ruled  that  salaries  of 
partners,  in  certain  cases,  were  deductible  in  determining  the 
amount  of  assessment  of  partnerships.  Likewise,  it  has  been 
held  under  present  law,  according  to  a  letter  written  by  the 
Department  under  date  of  October  19,  1917,  to  Daniel  B.  Cahn, 
of  New  York,  that  stipulated  salaries  or  drawings  of  partners, 
regularly  paid  or  credited  pursuant  to  the  terms  of  a  partnership 
agreement  for  services  rendered,  may  be  deducted  by  the  part- 
nership as  an  expense  of  doing  business,  provided  such  allow- 
ance, salary  or  drawings  are  not  excessive  in  amount  and  not 
greater  than  would  be  paid  by  a  corporation  for  similar  services 
rendered  by  an  officer  or  an  employee. 

The  following  is  a  copy  of  the  letter  to  Mr.  Cahn: 

"Receipt  is  acknowledged  of  your  letter  of  October  10, 
1917,  wherein  you  request  to  be  advised  whether  or  not  a 


150  INCOME  TAX — LAW  AND  ACCOUNTING 

salary  paid  by  a  domestic  partnership  to  one  of  its  individ- 
ual members  can  be  claimed  as  a  deduction  in  computing 
the  partnership's  liability  to  tax  under  the  provisions  of  the 
War  Excess  Profits  Tax  Law  of  October  3,  1917. 

"In  reply  you  are  advised  that  in  a  case  where,  under 
the  terms  of  a  partnership  agreement,  an  individual  member 
of  the  firm  is  regularly  paid,  or  is  allowed  to  draw,  or  has 
placed  to  his  individual  credit,  a  certain  stipulated  amount, 
as  compensation  for  services  rendered,  that  amount  may  be 
deducted  by  the  partnership  as  a  business  expense  if  it  is 
not  excessive  in  amount  and  is  no  greater  than  what  would 
ordinarily  be  paid  by  a  corporation  or  individual  conducting 
a  business  of  like  character  to  an  officer  or  employee  who 
rendered  services  similar  to  those  rendered  by  the  partner- 
ship member." 

The  position  taken  by  the  Treasury  Department  on  this 
question  is,  by  far,  the  more  equitable  in  effect,  and  one  to  which 
partnerships  will  take  no  exception.  The  law,  strictly  con- 
strued, however,  would  probably  result  in  a  conclusion  adverse 
to  partnerships,  inequitable  as  it  would  seem. 

In  the  absence  of  a  reversal  of  the  ruling  quoted  herein  in  favor 
of  partnerships,  they  are  permitted,  under  the  circumstances 
mentioned,  to  deduct  salaries  of  partners.1 

The  requirement  that  partnerships  shall  be  limited  in  their 
deductions  to  those  allowed  to  individuals  creates,  in  some  cases, 
an  anomalous  situation.  For  example,  where  a  partnership  of 
three  members,  employing  a  nominal  capital,  earns  a  net  profit 
for  the  taxable  year  of  $18,000,  and  there  are  no  provisions  for 
salaries  or  regular  drawings,  the  partnership  will  pay  an  Excess 
Profits  Tax  of  8  per  cent,  on  $18,000,  less  an  exemption  of  $6,000, 
namely,  $12,000,  amounting  to  $960,  equivalent  to  an  assessment 
of  each  partner  of  $320.  An  individual,  however,  engaged  on 
his  own  account,  in  the  same  line  of  work  or  business  as  the 
partnership,  with  the  same  amount  of  income  as  the  individual 
partners,  would  receive  the  same  amount  of  exemption  as  the 
partnership  and  would  go  untaxed.  No  doubt  this  problem  will 
be  dealt  with  in  the  next  Session  of  Congress. 

As  an  economic  principle,  labor,  not  required  to  be  paid,  does 

rThe  allowance  of  salaries  to  partners  has  been  affirmed  by  T.  D.  2611 
(Dec.  20,  1917).  See  page  169. 


WAR  EXCESS  PROFITS  TAX  !$! 

not  diminish  profits.    But  where  a  farmer  employs  the  members 
of  his  family,  whether  or  not  he  is  entitled  by  law  Wages  of 
to  the  benefit  of  their  labor,  an  equivalent  deduction,  Members 
for  tax  purposes,  should  be  allowed.     Representa-  er 
tive  Kitchin's  opinion  is  otherwise  according  to  his  not  De- 
statement  in  the  House  of  Representatives  in  reply  ductible. 
to  a  question  by  Representative  Reavis,  as  follows:  (From  Con- 
gressional Record,  October  16,  1917). 

"MR.  REAVIS.  Let  me  suggest  this  condition,  and  it 
doubtless  prevails  in  the  gentleman's  district  as  it  does  in 
mine:  Take,  for  instance,  the  farmer  who  has  a  large  family 
following  the  example  of  the  gentleman,  and  who  employs 
his  boys  upon  the  farm  to  aid  him  in  his  work.  Is  he  en- 
titled to  a  deduction  for  that  labor,  even  though  he  does 
not  pay  for  it? 

"MR.  KITCHIN.  No. 

"MR.  REAVIS.  Then  he  would  be  paying  excess-profits 
taxes  on  the  labor  rather  than  on  the  real  profits,  would  he 
not? 

"MR.  KITCHIN.  Yes,  to  a  certain  extent,  because  in  most 
States  if  the  child  is  under  21  his  labor  belongs  to  the  parent. 
"MR.  REAVIS.  He  is  entitled  to  the  labor? 
"MR.  KITCHIN.  Yes. 

"MR.  REAVIS.  That  being  true,  he  would  pay  a  tax  on 
the  returns  with  no  deductions  for  labor. 

"  MR.  KITCHIN.  And  that  is  one  reason  why  I  personally 
and  the  House  conferees  were  not  in  favor  of  including 
individuals  in  the  excess-profits  tax.  The  owner  of  practi- 
cally all  the  stock  of  the  corporation  could  charge  up  his  own 
salary  as  officer  of  the  corporation,  and  for  the  labor  of  his 
wife  and  children  if  they  performed  services  for  it,  and  deduct 
the  amounts  so  paid  or  charged  up  as  part  of  the  operating 
expenses  from  the  amount  of  taxable  income  or  profits,  while 
the  individual  in  same  kind  of  business  with  same  capital  and 
making  same  profits  could  not  have  any  such  deduction." 

Inasmuch  as  partnerships  and  individuals,  for  purposes  of 
the  Excess  Profits  Tax,  by  T.  D.  2611,  may  deduct  reasonable 
salaries  or  compensation  for  personal  services  actually  rendered 
in  the  conduct  of  business  or  trade,  there  is  no  doubt  but  that 
the  farmer  may  deduct  an  equivalent  for  the  services  of  himself 
and  members  of  his  family. 


152  INCOME   TAX — LAW   AND   ACCOUNTING 

Unquestionably,  the  law  will  be  fairly  and  equitably  admin- 
istered. To  obtain  an  equitable  administration,  the  law  must 
Administra-  ^e  construed  liberally  and  more  by  the  "rule  of 
tionpfLaw.  reason"  than  by  its  literal  interpretation.  An  old 
AppKcatwn  doctrine  holds  that  a  statute  should  be  interpreted 
Real  and  according  to  the  intent  of  the  legislators.  In  the 
Nominal  case  of  an  exceptional  tax  measure,  however,  such  as 
Capital.  that  of  ^  £xcess  profits  Tax,  it  would  be  unreason- 
able to  expect  that  the  intricacies  of  business  and  commercial 
practice  could  have  been  foreseen  and  anticipated.  Moreover,  to 
have  contemplated  the  inherent  difficulties  and  provided  for  de- 
tails of  administration  would  have  required  a  tax  volume,  that,  of 
necessity,  would  have  been  technical,  cumbersome  and  unwieldy. 

To  what  extent  an  application  of  the  "rule  of  reason"  will  be 
justified  must  depend  upon  the  facts  of  the  particular  case  under 
consideration,  and  must  be  determined  with  a  mew  to  the  spirit 
of  the  law  and  the  cause  which  actuated  Congress  to  enact  it. 

Not  only  is  it  important,  in  an  equitable  administration  of  the 
Act,  to  guard  against  excessive  assessments,  but  it  is  equally 
as  important  to  prevent  under-assessments,  that,  by  reason 
thereof,  effect  undue  advantage  either  in  individual  or  classes 
of  cases.  In  so  far  as  practicable  particular  industries  should  be 
taxed  upon  a  uniform  and  consistent  basis  of  assessment.  For 
example,  a  case  recently  brought  to  the  writer's  notice:  A  mining 
property,  yielding  an  annual  net  income  of  about  $250,000,  was 
inherited  by  three  members  of  a  family.  For  the  purpose  of 
establishing  perpetuity  of  organization,  a  corporation  was 
formed  with  a  nominal  capital  stock  of  $10,000  and  the  property 
was  conveyed  to  the  corporation  in  exchange  for  the  capital 
stock  thereof.  Such  corporation  could  probably  be  construed 
to  have  "  not  more  than  a  nominal  capital."  Adjoining  the  prop- 
erty in  question  is  a  mine  of  about  the  same  size  and  yield  as 
that  of  the  close  corporation's,  but  said  property  is  owned  by  an 
operating  company  having  an  outstanding  capital  stock  of  one 
million  dollars.  To  tax  the  close  corporation  on  the  basis  of  a 
nominal  capital  would  impose  upon  it  an  excess  profits  tax  of 
$19,760  upon  an  income  of  $250,000,  whereas  the  corporation 
operating  the  adjoining  property,  on  the  same  income,  but  with 
a  capital  of  a  million  dollars,  would  be  assessed,  under  the  pro- 


WAR   EXCESS  PROFITS  TAX  153 

gressive  rates,  from  $41,400  to  $45,400.  This  inequality  would 
give  the  close  corporation  an  unwarranted  advantage  over  the 
corporation  with  the  larger  capital  stock.  Admittedly,  the 
close  corporation  has  only  a  nominal  capital  stock,  but  the 
tangible  property  owned  by  it  may  be  worth  as  much,  or  per- 
haps more,  than  the  invested  capital  of  its  neighbor  with  the 
larger  stock  capitalization.  Expediency,  in  cases  of  this  kind, 
requires  that  where  real  capital  (in  contradistinction  to  nominal 
capital)  is  employed,  the  enterprise  should  be  taxed  upon  the 
basis  of  "more  than  a  nominal  capital."  The  deduction,  in  such 
case,  should  be  computed  either  upon  the  actual  invested  capital 
(if  that  is  properly  ascertainable)  or  the  corporation  should  be  al- 
lowed a  deduction  based  upon  that  of  representative  concerns  in  a 
similar  trade  or  business,  as  provided  for  in  section  210  of  the  Act. 

The  same  principles  can  be  aptly  applied  to  businesses  that  are 
not  of  an  individualistic  character.  Where  the  average  deductions 
of  "representative"  concerns  are  inapplicable,  or  where  there  are 
no  representative  concerns  in  a  similar  trade  or  business  and  where 
neither  of  the  prescribed  methods  of  computing  the  tax  (8  per 
cent,  or  progressive  rates)  are  clearly  pertinent  to  the  particular 
case,  the  taxpayer  should  apply  to  the  Department  for  a  special 
ruling  upon  such  case.  If  a  ruling  is  not  obtainable  in  due  time, 
the  taxpayer  should  make  a  return  upon  the  basis  that  appears, 
from  a  consideration  of  the  requirements  of  law,  and  the  facts  of 
the  case,  to  be  the  most  relevant  of  the  prescribed  methods.  The 
return  should  be  accompanied  by  a  complete  and  comprehensive 
statement  of  all  material  facts  upon  which  the  Department  will 
be  able  to  judge  as  to  the  propriety  of  the  method  employed. 

The  only  provisions  for  revaluations  of  tangible  property  in 
connection  with  the  ascertainment  of  invested  capital  under 
the  Excess  Profits  Tax  Law,  are  contained  in  sec-  Revaluation 
tion  207  (a)  with  respect  to  corporations  and  part-  of  Property, 
nerships  and  207  (b)  as  to  individuals. 

In  the  case  of  corporations  and  partnerships,  tangible  property 
received  in  exchange  for  stock  or  shares  therein  may  be  stated 
at  the  cash  value,  except  that  if  the  property  was  acquired  prior 
to  January  i,  1914,  then  at  the  cash  value  as  of  that  date;  in 
no  case,  however,  can  such  value  be  stated  in  excess  of  the  par 
value  of  the  original  stock  or  shares  issued  for  the  property. 


154  INCOME   TAX — LAW  AND  ACCOUNTING 

Cash  capital  should  be  stated  at  the  "actual  cash  paid  in." 
Construing  this  literally,  a  deficit  need  not  be  deducted  from 
capital  paid  in,  for  purposes  of  invested  capital. 

Paid  in  or  earned  surplus  and  undivided  profits,  except  profits 
earned  during  the  taxable  year,  also  comprise  invested  capital 
under  the  law.  The  amount  of  surplus  can  best  be  ascertained 
for  such  purpose  by  preparing  a  statement  of  the  assets  and 
liabilities  in  which  the  assets  (tangible  and  intangible)  should 
be  stated  at  values  in  respect  of  limitations  of  law.  The  excess  of 
assets  so  valued,  over  the  liabilities  plus  the  capital  stock,  will 
comprise  the  surplus.  (See  Example  No.  i,  page  155.) 

In  the  case  of  individuals,  tangible  property  paid  into  a  trade 
or  business,  other  than  cash,  should  be  stated  at  the  actual 
cash  value  of  the  property  at  the  tune  of  such  payment,  except 
that  property  paid  in  prior  to  January  i,  1914,  should  be  stated 
at  its  cash  value  as  of  January  i,  1914.  In  connection  with  the 
latter  provision,  the  value  as  at  January  i,  1914,  does  not  appear 
to  be  limited  to  the  original  value  at  which  the  property  was  paid 
in  as  in  the  case  of  corporations.  On  the  other  hand,  there  is  no 
provision  for  the  inclusion  of  earned  surplus  employed  in  the 
business  of  the  individual.  This  omission  will,  no  doubt,  be 
ruled  upon  by  the  Treasury  Department. 

An  equitable  interpretation  of  the  law  will  require  that  in- 
dividuals shall  be  permitted  to  compute  invested  capital  in- 
clusive of  accumulated  earnings,  and  that  construction  may 
reasonably  be  within  the  purview  of  the  provision  "the  actual 
cash  value  of  tangible  property  paid  into  the  trade  or  busi- 
ness. .  .  ."  Capital  is  an  ever  changing  quantity  in  a  com- 
mercial business.  Earnings  that  are  allowed  to  remain  invested 
in  a  business,  increase  its  capital.  There  is  no  legal  obligation 
on  the  part  of  an  individual,  conducting  trade,  to  have  any  par- 
ticular sum  permanently  invested  as  in  the  case  of  a  corporation. 

Tangible  property  paid  in  prior  to  January  i,  1914,  may  be 
stated  at  its  value  at  that  tune,  but  that  does  not  provide  for 
profits  earned  and  allowed  to  remain  invested  in  the  business 
since  that  date.  The  taxpayer  should  obtain  a  ruling  upon  this 
point  from  the  Collector  of  his  district.1 

1  Until  a  ruling  has  been  made  by  the  Department  the  writer  suggests 
that  the  individual  taxpayer  include  in  invested  capital  all  assets  that  are 
employed  in  the  business,  whether  paid  in  or  earned. 


WAR  EXCESS  PROFITS  TAX  155 

EXAMPLE  No.  i — COMPUTING  INVESTED  CAPITAL  AS  AT  BEGINNING  OF 

FISCAL  YEAR 

Item  Balance  per      Invested 

No.  Assets  Books  of  Account  Capital 

1  Cash  in  Office  and  in  Banks $  15,200.00  $  15,200.00 

2  Accounts  Receivable $  48,300.00 

Reserve  for 

Bad  Debts1.  ..  $  2,415.00 
Reserve  for  cash 

discounts  on 

sales1 1,200.00        3,615.00      44,685.00 

Analysis  of  accounts: 

Total $48,300.00 

Uncollectible..  800.00 


Good 47,500.00  47,500.00 


3  Bills  Receivable  (Notes) 20,500 .  oo      20,500 .  oo 

4  Inventory  of  Stock  on  Hand 152,000 . oo     152,000 . oo 

5  Investments: 

Liberty  Bonds,  $%  s  * 50,000.00 

"       4      s  * 75,000.00 

125,000.00     125,000.00 

25  shares  of  X.  Y.  Z.  Co., 

Inc.  (Common) 12,500.00 

15  shares  of  X.  Y.  Z.  Co., 
Inc.  (Preferred) 15,000.00 

27,500.00 

6  Plant  and  Machinery  (Cost)  . . .     125,000.00 

Written  off  in  excess  of 
Income  Tax  al- 
lowances      25,000.00 

Depreciation  de- 
ducted from  In- 
come Tax  re- 
turns and  al- 
lowed      25,000.00      50,000.00 


Book  Value 75,000.00      75,000.00 

1  Not  deducted  from  Income  Tax  Return. 

2  Liberty  Loan  Bonds  cannot  comprise  invested  capital  until  after  April  24, 
1917,  or  September  24,  1917,  the  dates  that  the  first  and  second  issues  were 
respectively  approved. 


156  INCOME  TAX — LAW  AND  ACCOUNTING 

Cost $125,000. oo 

Depreciation  allowed 

(Income  Tax) 25,000.00 


Value  (Invested  Capital) 100,000.00  $100,000.00 


7  Furniture  and  Fixtures  (Cost) . .        4,500.00 

Written  off  in  excess  of 
Income  Tax  de- 
ductions        2,200.00 

Depreciation  de- 
ducted from  In- 
come Tax  re- 
turns      2,250.00        4,450.00 


Nominal  Book  Value 50.00 

Cost 4,500.00 

Depreciation  deducted 
from  Income  Tax  returns.  .         2,250.00 


Value  (Invested  Capital) 2,250.00  2,250.00 


8  Land: 

Acquired  for  Capital  Stock 

(Par  Value) 75,000.00 

Erroneously  written  off  to 
effect  agreement  with 
local  real  estate  assess- 
ment value 15,000.00 


Book  value 60,000.00 

Cash  value,  January  i,  1914 75,000.00 

9  Buildings: 

Acquired  for  Capital 
Stock  (Par  Value) 150,000.00 

Written  off  to 
Reserve  for  De- 
preciation in 
excess  of  In- 
come Tax  Al- 
lowances      20,000.00 

Depreciation  de- 
ducted from 


WAR  EXCESS  PROFITS  TAX  157 

Income  Tax 
returns  and 
allowed $25,000.00  $45,000.00 

Book  value 105,000.00  $105,000.00 

Cash  value,  Jan.  i,  1914 140,000.00 

Depreciation  deducted 

and  allowed  in  Income 

Tax  returns  since 

Jan.  i,  1914 15,000.00 


Value  (Invested  Capital).  . . .     125,000.00  $125,000.00 

10  Good  Will  (Acquired  in 
exchange  for  Capital 
Stock  prior  to  March  3, 

191 7) 100,000 .  oo 

Written  off  to  surplus 50,000.00      50,000.00 


Allowed  as  invested  capital  (not  in  excess 

of  20%  of  capital  stock) 80,000.00 

ii  Prepayments: 

Prepaid  Unexpired 

Insurance 675 .  oo 

Prepaid  Interest 400.00        1,075.00        1,075.00 


12  Aggregate  Totals $676,010.00  $743,525.00 

Balance  per        Invested 

Item  Liabilities  Books  of          Capital 

No.  Account        Deductions 

13  Accounts  Payable $  30,000 .  oo  $  30,000 .  oo 

14  Bills  Payable  (Notes) 15,000.00       15,000.00 

15  Accruals: 

Accrued  Taxes $     1,000.00 

Accrued  Interest 2,500.00 

3,500.00        3,500.00 

16  First  Mortgage  Bonds  Payable 100,000.00    100.000,00 

17  Dividend  Declared  on  Preferred  Stock  (5%).       10,000.00      10,000.00 

18  Total  Liabilities 158,500.00     158,500.00 

19  Reserve  for  Amortization  of  Bonds 25,000.00 

20  Reserve  for  Contingencies 10,000.00 

21  Reserve  for  Equalization  of  Dividends 20,000.00 


158  INCOME  TAX — LAW  AND  ACCOUNTING 

22  Capital  Stock: 

Common $200,000 .  oo 

Preferred 200,000 .  oo 

• $400,000.00 

23  Surplus 62,510 .  oo 


Totals 676,010 .  oo  $158,500 .  oo 

24  Invested  Capital 585,025 .00 


25  Aggregate  Totals $676,010.00  $743,525.00 

EXAMPLE  No.  2 — ALTERNATIVE  METHOD  (No.  i)  OF  COMPUTING  INVESTED 

CAPITAL 

Total  Assets,  as  per  books  of  account  (Item  12) $676,010.00 

Total  Liabilities,  as  per  books  of  account  (Item  18) 158,500.00 


Assets  in  excess  of  Liabilities  as  per  books  of  account $517,510.00 

Properties  inadequately  stated  in  Books  of  Account:      Add 
Accounts  Receivable:  (Item  2) 

Collectible  Accounts.  . . $  47,500.00 

Balance,  per  books  of  account. . . .       44,685 .00  $  2,815 .00 


Plant  and  Machinery:  (Item  6) 

Value 100,000.00 

Balance,  per  books  of  account ....       75,000.00    25,000.00 


Furniture  and  Fixtures:  (Item  7) 

Value 2,250.00 

Balance,  per  books  of  account ....  50.00      2,200.00 


Land:  (Item  8) 

Cost  (Cash  Value  Jan.  i,  1914) . . .       75,000.00 
Balance,  per  books  of  account 60,000 .  oo    15,000 .  oo 


Buildings:  (Item  9) 

Value 125,000.00 

Balance,  per  books  of  account ....     105,000 .  oo    20,000 .  oo 


Good  Will:  (Item  10) 
Allowed  by  law  (20%  of  capital 

stock) 80,000 .  oo 

Balance,  per  books  of  account ....       50,000 .  oo    30,000 .  oo 


WAR  EXCESS  PROFITS   TAX  159 

Add $95,015.00 


Total 612,525.00 

Disallowed  for  purposes  of  Invested  Capital:  Deduct 

Securities  excluded  by  law  (Item  5) $27,500.00 


Deduct 27,500.00 


INVESTED  CAPITAL  (Item  24) $585,025 .00 


EXAMPLE  No.  3— ALTERNATIVE  METHOD  (No.  2)  OF  COMPUTING  INVESTED 

CAPITAL 

Capital  Stock  Outstanding  (Item  No.  22) $400,000.00 

Surplus,  per  books  of  account  (Item  23) 62,510.00 

Reserves: 

Amortization  of  Bonds  (Item  19) 25,000 .  oo 

For  Contingencies  (Item  20) 10,000 .  oo 

For  Equalization  of  Dividends  (Item  21) 20,000.00 

Additions  to  Invested  Capital  by  reason  of  properties  being 
inadequately  stated  in  books  of  account  (Items  2,  6,  7,  8,  9, 

and  10,  per  itemized  list  in  Example  No.  2) 95,015 .00 


Total 612,525.00 

Deduct  Securities  excluded  by  law  (Item  5) 27,500 .  oo 


INVESTED  CAPITAL  (Item  24) $585,025 . oo 


NOTES  ON  ITEMS  CONTAINED  LN  EXAMPLE  No.  i,  COMPUTING 
INVESTED  CAPITAL  (PAGE  155) 

The  inclusion  of  cash  on  hand  and  in  banks  is  *tein  No-  *» 
conditioned  upon  the  funds  being  used  and  employed  Hand^and 
in  the  business.  in  Banks. 

Accounts  receivable  constitute  invested  capital  at  the  total 
amount  of  accounts  considered  good.  Any  accounts  that  have 
been  deducted  from  income  tax  returns,  as  uncol-  jtem  j^o.  2, 
lectible,  shall  not  be  included.  Suspense  accounts  Accounts 
that  are  considered  as  realizable  in  whole  or  in  part,  Receivable, 
and  which  have  not  been  returned  as  bad  debts  for  income  tax 
purposes,  may  be  included  to  such  an  amount  as  they  are  con- 


l6o  INCOME   TAX — LAW  AND   ACCOUNTING 

sidered  good  and  collectible.  (A  secret  reserve  decreases  the  in- 
vested capital  and  is  detrimental  to  the  interests  of  the  taxpayer.) 

A  reserve  for  bad  debts  is  not  deductible  from  income  for  tax 
purposes,  and,  hence,  need  not  be  deducted  in  computing  in- 
vested capital.  The  same  is  true  of  a  reserve  for  cash  discounts 
on  sales. 

Trade  discounts,  however,  which  are  unconditional  allowances 
may  be  reserved  and  deducted  from  income  if  they  were  not 
deducted  from  invoices  rendered,  but  the  amount  thereof  should, 
in  such  case,  be  deducted  from  accounts  receivable  in  computing 
invested  capital. 

Notes  receivable  should  be  stated  at  the  book  value  thereof. 
Item  No.  3,  The  qualifications  in  respect  of  bad  debts,  with 
Bills  Re-  regard  to  Item  2,  are  also  applicable  to  bills  receiv- 
ceivable.  able 

Treasury  Department  rulings  prescribe  that  inventories  shall 
Item  No.  4,  be  computed  at  cost.1  The  amount  of  inventory 
Stock  on  use(j  m  determining  the  profit  or  loss  should  also 

be  used  for  purposes  of  invested  capital. 

Invest-0*6'  Liberty  Bonds  and  all  obligations  of  the  United 
ments.  States  constitute  invested  capital.  (Law,  section  207.) 

Investments  in  stocks  and  bonds  of  other  corporations  or 
organizations,  and  other  assets,  the  income  from  which  is  not 
subject  to  the  Excess  Profits  Tax,  do  not  constitute  invested 
capital  under  the  Act. 

In  the  case  at  point,  the  plant  and  machinery  cost  $125,000. 
There  had  been  written  off,  and  deducted  and  allowed  from  in- 
Item  No.  6,  come  tax  returns,  the  sum  of  $25,000,  and,  in  addi- 
Plant  and  tion,  a  like  sum  had  been  written  off  but  deduction 
Machinery.  of  the  same?  for  tax  purpOses,  had  been  disallowed 

by  the  Department  on  the  ground  that  the  same  was  excessive. 
The  actual  value  of  the  property  is  assumed  to  be  $100,000. 
Said  amount,  representing  the  cost,  less  the  depreciation  allowed 
for  tax  purposes,  is  stated  as  available  for  purposes  of  invested 
capital. 

The  English  practice,  as  stated  by  Mr.  W.  E.  Snelling,  in  his 
work  "Excess  Profits  Duty"  (1916)  is  as  follows: 

1  By  authority  of  T.  D.  2609  inventories  may  be  valued  at  cost  or  market 
price  whichever  is  lower. 


WAR  EXCESS  PROFITS  TAX  l6l 

"Plant  and  Machinery  should  appear  in  the  capital  computa- 
tion at  its  total  capitalised  cost  to  date,  less  the  aggregate  of 
the  Income  Tax  allowance  to  date." 

Plant  and  machinery  received  hi  exchange  for  capital  stock 
acquired  prior  to  January  i,  1914,  may  be  stated  at  the  cash 
value  as  of  that  date,  but  such  cash  value  shall  not  be  in  excess 
of  the  amount  of  stock,  at  par,  paid  therefor.  If  depreciation 
has  been  deducted  thereon  since  that  date  the  aggregate  amount 
of  same  should  be  deducted  in  determining  invested  capital  for 
the  taxable  year.  Property  acquired  since  January  i,  1914, 
may  be  valued  at  cost,  less  depreciation  deducted  thereon  from 
income  tax  returns. 

In  the  event  that  an  excessive  rate  of  depreciation  has  been 
deducted  from  returns  of  past  years  it  may  be  permissible  to 
file  an  amended  return  for  such  years  with  a  lesser  deduction. 
The  amount  shown  to  be  due  by  the  amended  return,  if  accepted 
by  the  Department,  will  be  taxable  at  the  rate  applicable  to  the 
year  for  which  such  amended  return  is  made.  Good  and  suf- 
ficient reasons  must  be  furnished  to  the  Department  in  order 
to  effect  an  acceptance  of  the  amended  return.  For  rulings,  in 
this  connection,  see  page  195. 

Any  depreciation  that  was  deducted  from  returns,  and  written 
off  on  the  books  of  account,  but  which  was  not  allowed  by  the 
Department,  does  not  necessarily  reduce  the  value  for  purposes 
of  invested  capital. 

Depreciation  that  was  deducted  prior  to  the  incidence  of  the 
Excise  and  Income  Taxes  may  or  may  not  reduce  the  value  of 
property  by  the  amount  thereof.  If  depreciation  was  written 
off,  such  writing  off  is  evidence  of  depreciation  having  been 
sustained.  If,  however,  it  becomes  evident  that  excessive  de- 
preciation had  been  written  off  an  error  was  made  and  there 
can  be  no  valid  reason  why  the  error  should  not  thereafter  be 
remedied.  But  if  such  error  was  made  since  returns  of  income 
have  been  required,  amended  returns  for  the  years  affected 
should  be  filed  and  the  additional  tax  paid. 

Ordinarily,  the  difference  between  the  cost  of  wasting  prop- 
erty and  depreciation  charged  off  indicates  the  value  for  pur- 
poses of  invested  capital.  Where,  however,  the  book  value  has 
been  arbitrarily  written  down  for  the  purpose,  for  example, 


1 62  INCOME   TAX — LAW  AND  ACCOUNTING 

of  creating  a  secret  reserve,  by  carrying  the  property  at  a  nominal 
book  value,  if  such  deductions  were  not  made  from  income  tax 
returns  the  actual  value  may  be  reestablished  by  providing 
only  for  the  wear  and  tear  sustained. 

In  placing  values  upon  property  for  capital  purposes  the  treat- 
ment of  each  case  must  necessarily  depend  upon  the  particular 
circumstances  attending  it.  The  earning  power  or  productivity 
of  property  must  be  given  due  consideration  as  well  as  the  sound 
or  intrinsic  value  of  such  property. 

The  total  cost  of  the  furniture  and  fixtures  was  $4,500.  There 
had  been  arbitrarily  charged  off  to  Surplus  the  sum  of  $2,200, 
Item  No  7  wn^c^  had  not  keen  deducted  from  tax  returns;  de- 
Furniture  '  preciation  had  been  charged  off  and  deducted  from 
and  Fix-  income  for  tax  purposes  aggregating  50  per  cent,  of 
the  total  cost  of  the  property,  namely,  $2,250;  leav- 
ing a  nominal  book  value  of  $50.  For  the  purpose  of  the  illus- 
tration it  is  assumed  that  the  amount  deducted  from  tax  returns 
(50  per  cent.)  represents  the  actual  wear  and  tear  sustained  and 
that  the  remaining  50  per  cent,  or  $2,250  is  the  actual  value  of, 
and  invested  capital  in  the  property  for  the  taxable  year.  No 
cognizance  need  be  taken  of  the  amount  arbitrarily  charged  off 
($2,200)  because  the  same  does  not  represent  wear  and  tear  or 
actual  loss  sustained. 

It  is  assumed  that  the  land  was  acquired  in  exchange  for 
capital  stock  of  the  par  value  of  $75,000.  There  had  been  er- 
Item  No.  8,  roneously  charged  off  the  sum  of  $15,000  to  effect 
Land.  an  agreement  of  the  book  account  with  the  local 

real  estate  tax  assessment.  The  object  of  showing  the  lesser 
value  upon  the  books  of  account  had  been  to  be  able  to  rep- 
resent to  the  local  tax  assessors  that  $60,000  was  the  amount 
at  which  the  land  was  carried  in  their  books  of  account,  and,  also, 
to  have  their  local  tax  return  in  agreement  with  their  accounts. 
This  reduction  in  the  book  value  does  not  defeat  the  cor- 
poration of  valuing  the  land  at  its  cash  value  on  January  i, 
1914,  as  provided  by  section  207  (a)  of  the  Excess  Profits  Tax 
Law. 

The  buildings,  as  in  the  case  of  the  land,  were  acquired  in  ex- 
Item  No.  9,  change  for  capital  stock  of  the  corporation  at  the  par 
Buildings.  vaiue  of  $150,000.  There  had  been  charged  off  and 


WAR  EXCESS  PROFITS  TAX  163 

deducted  for  tax  purposes  the  sum  of  $20,000,  but  as  the  same 
had  not  been  allowed  by  reason  of  being  excessive,  the  same  may 
be  disregarded  in  determining  invested  capital.  An  aggregate 
sum  of  $25,000  had  been  deducted  and  allowed  in  tax  returns; 
of  this  amount  $15,000  had  been  deducted  since  January  i, 
1914.  The  book  value  stood  at  $105,000.  By  authority  of 
section  207  (a)  of  the  law,  the  buildings  were  re-valued  as  at 
January  i,  1914,  at  their  cash  value,  ascertained  to  be  $140,000; 
deducting  the  depreciation  of  $15,000,  sustained  since  January  i, 
1914,  leaves  a  value  for  invested  capital  of  $125,000. 

The  good  will  had  been  acquired  in  exchange  for  capital  stock 
at  the  par  value  of  $100,000  prior  to  March  3,1917,  and  pursuant 
to  authority  of  law  [section  207  (a)  3]  is  stated  as  item  No.  10, 
invested  capital  at  20  per  cent,  of  the  capital  stock,  Good  Wiu- 
namely,  $80,000.  The  fact  that  the  corporation  had  written  off 
50  per  cent,  of  the  account  against  surplus  does  not  deprive  it 
of  a  full  deduction  of  the  20  per  cent,  of  the  capital  stock.  The 
same  would  be  true  if  the  account  had  been  completely  written 
off,  provided,  of  course,  that  the  good  will  had  not  been  disposed 
of  by  sale  or  otherwise  and  is  used  in  the  business.  For  a  more 
complete  discussion  of  "good  will"  and  intangible  property, 
see  page  138. 

Prepaid  expenses  or  deferred  assets  such  as  pre-  Item  No.  11, 
paid  unexpired  insurance  and  prepaid  interest,  con-  Assets,  Pre- 
stitute  invested  capital.  payments. 

These  represent,  respectively,  the  total  assets  as  Item  No  12> 
they  appear  in  the  books  of  account  and  as  they  have  Aggregate 
been  valued  for  purposes  of  invested  capital.  Totals. 

Item  No.  13, 

Accounts 

Payable. 


All  of  these  items  (No.  13  to  No.  16,  inclusive)  be-  I*®"11*0'  14» 
ing  liabilities  of  the  corporation,  are  a  deduction  pay^ble. 
from  the  aggregate  total  of  assets  in  determining  the  Item  No  lg 
surplus  of  the  business,  which,  by  provision  of  law  Accrued* 
constitutes  invested  capital.  Liabilities. 

Item  No.  16, 
Bonds 
Payable. 


164  INCOME   TAX — LAW  AND  ACCOUNTING 

Item  No.  17,      A  dividend  becomes  a  liability  as  at  the  time  of 

Dividend      jts  declaration,  and,  as  such,  is  a  reduction  of  the 

surplus  for  purposes  of  invested  capital. 

This  item  needs  no  explanation,  except  that  the  amount 
thereof,  deducted  from  the  totals  of  assets  (Item  12)  per  books 
Item  No.  18,  °f  account,  and  as  computed  for  invested  capital 
Total  Lia-  *  represent,  respectively,  the  net  worth  as  per  the 
bilities.  books  of  account  and  the  capital  and  surplus  com- 
prising the  invested  capital,  the  latter  being  shown  in  Item  24. 

This  reserve  has  been  created  by  a  charge  to  surplus  account 
Item  No.  19,  and  a  credit  to  the  reserve.  It  was  not  deducted 

Reserve  for  from  incOme  tax  returns  because  the  offset  to  it  is 

Amortiza-  TT  ,  . 

tion  of  not  an  expense.  Hence,  such  a  reserve  is  equivalent 
Bonds  to  surplus. 

A  reserve  for  contingencies  may  or  may  not  be  surplus.  If, 
in  its  establishment,  it  was  deducted  from  earnings  or  profits, 
Item  No.  20,  as  an  expense  or  loss,  and  was  deducted  from  in- 
Contingen-r  come  tax  returns,  it  would  not  be  surplus  for  pur- 
cies.  poses  of  invested  capital.  In  the  case  at  point,  it 

was  created  by  a  charge  to  and  reduction  of  surplus  account  and, 
therefore,  is,  itself,  surplus. 
Item  No.  21, 
Reserve  for      Such  a  reserve  always  constitutes  a  part  of  surplus. 

Dividends. 

Item  No.  22,  This  item  represents  the  paid  in  and  outstanding 
Capital  capital  stock  of  the  corporation.  As  shown  by 
Stock.  Items  8,  9  and  10,  respectively,  stock  was  issued  in 
exchange  for: 

Land $  75,000.00 

Buildings 150,000.  oo 

Good  Will 100,000. oo 


Total $325,000.00 

The  balance  of  $75,000  was  issued  for  cash;  and  the  total, 
$400,000,  deducted  from  the  excess  of  assets  (Item  12)  over 
the  liabilities  (Item  18)  constitutes  the  surplus  of  the  corpo- 
ration. 


WAR  EXCESS  PROFITS  TAX  165 

This  account  represents  the  accumulated  profits,  except 
those  that  were  established  in  the  reserve  accounts  item  No.  23, 
for  specific  purposes,  which  also  constitute  surplus.  Surplus. 

This  item  is  the  excess  of :  Item  No.  24, 

Invested 
Item  12  (Assets) $743,525 .00  Capital. 

over    "     18  (Liabilities) 158,500.00 


and  comprises  the  invested  capital  based  on  values 
for  that  purpose,  of  .........................  $585,025  .  oo 

The  invested  capital,  in  the  example,  is  made  up  of: 

Capital  paid  in  ...............................  $400,000.00 

Accumulated  earnings  ........................     185,025  .  oo 

Total  .......................................  $585,025.00 

To  the  above  amount  should  be  added  the  monthly  average 
of  any  additional  capital  paid  in  during  the  taxable  year,  but  no 
part  of  the  earnings  of  the  taxable  year  may  be  added  to  the  in- 
vested capital  of  such  taxable  year  for  purposes  of  deductions 
under  the  Excess  Profits  Tax. 

Item  No.  26,     These  totals,  respectively,  agree  with  totals  in 
Item™. 


EXAMPLE  No.  2  (PAGE  158) 

This  example  presents  a  short  alternative  method  of  computing 
invested  capital.  It  is  based  primarily  upon  the  book  account 
balances.  To  the  excess  of  assets  over  liabilities,  as  shown  by 
the  books  of  account,  are  added  all  items  that  were  increased 
by  valuations  placed  thereon  in  accordance  with  "invested 
capital  values,"  and  reduced  by  the  amount  of  item  that  is 
not  recognized  by  law  as  a  part  of  invested  capital. 

EXAMPLE  No.  3  (PAGE  159) 

Example  No.  3  shows  another  alternative  method  of  comput- 
ing invested  capital.  This  method  is  predicated  upon  the  capi- 


'1 66  INCOME  TAX — LAW  AND  ACCOUNTING 

tal  stock  plus  surplus,  as  shown  by  the  books  of  account,  to 
which  are  added  and  subtracted  the  differences  between  the 
book  values  and  values  for  purposes  of  invested  capital. 

SUGGESTIONS  IN  CONNECTION  WITH  THE  VALUATION  OF  ASSETS 
FOR  PURPOSES  OF  INVESTED  CAPITAL  NOT  INCLUDED^  IN 
EXAMPLE  No.  i  Vi 

By  rulings  of  the  Treasury  Department,  organization  expenses 
are  not  deductible  from  income;  they  are  held  to  be  capital  ex- 
Organiza-  penditures.  (See  page  in).  Although,  from  a  com- 
tion  Ex-  mercial  viewpoint,  capitalized  expenses  are  looked 
ies*  upon  with  disfavor,  where  such  expenses  have  been 
paid  by  capital  stock  or  out  of  moneys  received  from  the  original 
sale  of  stock,  were  set  up  as  assets,  and  have  not  been  charged 
off,  it  would  seem  proper  to  state  them  as  invested  capital  to  the 
amount  actually  so  paid.  Such  items  should  only  consist  of 
the  initial  expenses  incurred  in  connection  with  organizing  a 
corporation;  no  additions  should  be  made  thereto  after  the  or- 
ganization has  been  completed. 

An  unpaid  subscription  to  capital  stock,  although  an  account 

Subscrip-      receivable,  is  not  such  an  asset  as  will  constitute 

tions  to         invested   capital.     It   is  not  capital  paid  in,   in 

Capital         anv  sense  of  that  term,  nor  is  it  employed  in  the 

business. 

Treasury  stock,  in  the  usual  acceptation  of  that  term,  denotes 
stock  that  has  been  fully  paid  for  in  cash  or  property  and  re- 
Treasury  turned  to  the  corporation.  Inasmuch  as  invested 
Stock.  capital  is  defined  by  the  Act  as  actual  cash  paid  in, 

the  actual  cash  value  of  tangible  property  paid  in  other  than 
cash,  and  intangible  property  bona  fide  paid  for  by  cash  or  tan- 
gible property  or  by  stock  (with  limitations)  it  must  follow  that 
treasury  stock,  fully  paid  for,  constitutes  invested  capital.  This 
conclusion  is  reached,  not  by  reason  of  value  attaching  to  the 
treasury  stock  as  an  asset  of  the  corporation,  but  because  it 
represents  capital  paid  in.  Stock  repurchased  by  a  corporation 
cannot  be  so  treated  because  upon  its  reacquirement  by  purchase, 
it  ceases  to  be  paid  in. 

Unexecuted  contracts  purchased  for  cash,  property,  or  stock, 


WAR  EXCESS  PROFITS   TAX  167 

may   in    some   cases   constitute    invested   capital,  Unexecuted 
subject,  however,  to  the  limitations  of  law  prescribed  Contracts. 
by  section  207  as  to  intangible  property. 

Patents. 
These  items  are  dealt  with  on  page  138. 


Franchise. 

£  Assets  of  this  class  constitute  invested  capital  to  the  amount 
'of  cost  thereof,  less  the  amount  charged  off  against  income, 
provided  that  they  are  employed  in  the  business.  Patterns 
Unused  patterns,  designs,  plates  or  dies  that  have  ^^  e 
been  discarded  and  play  no  part  in  the  production  plates  and 
of  profits  should  not  be  stated  as  invested  capital,  ex-  Dies. 
cept,  perhaps,  at  their  residual  value,  if  they  have  any.    Assets 
of  the  same  general  character  as  those  under  discussion  should 
be  judged  in  respect  of  invested  capital  principally  upon  their 
productivity  in  the  business,  but  always  limited  to  the  cost,  less 
that  part  thereof  which  has  been  charged  off. 

TREASURY  DECISIONS  UNDER  THE  EXCESS  PROFITS  TAX 

Stock  on  hand  of  merchandise,  supplies,  and  work  in  process 
of  mercantile  and  manufacturing  businesses,  and  of  inventories 
securities  held  by  dealers,  for  purposes  of  income  taxes  of  Mer- 

and  excess  profits  taxes,  may  be  inventoried  either:      chandise, 

etc.,  and 

(a)  at  cost,  or  Securities 

(b)  at  cost  or  market  price  whichever  is  lower.        held  by 
Whichever  method  is  adopted  must  be  adhered  to  in  Dealers- 
subsequent  years  unless  a  change  in  the  method  is  authorized  by 
the  Commissioner  of  Internal  Revenue. 

This  ruling  is  only  applicable  to  commodities  dealt  in  and  not 
to  subjects  of  more  or  less  permanent  investment.  T.  D.  2609. 

Washington,  D.  C,  December  19,  1917. 
To  Collectors  of  Internal  Revenue,  Revenue  Agents,  and  Others 
Concerned: 

i.  For  the  purposes  of  income  and  excess  profits  tax  re- 
turns, inventories  of  merchandise,  etc.,  and  of  securities, 
will  be  subject  to  the  following  rules: 

A.  Inventories  of  supplies,  raw  materials,  work  in  process 
of  production  and  unsold  merchandise,  must  be  taken  either 


1 68  INCOME  TAX — LAW  AND  ACCOUNTING 

(a)  at  cost,  or  (b)  at  cost  or  market  price  whichever  is 
lower;  provided  that  the  method  adopted  must  be  ad- 
hered to  in  subsequent  years  unless  another  be  authorized 
by  the  Commissioner  of  Internal  Revenue. 

B.  A  dealer  in  securities  who  in  his  books  of  account 
regularly  inventories  unsold  securities  on  hand  either  (a) 
at  cost,  or  (b)  at  cost  or  market  price  whichever  is  lower, 
may  for  purposes  of  income  and  excess  profits  taxes  make 
his  return  upon  the  basis  upon  which  his  accounts  are 
kept;  provided  that  a  description  of  the  method  employed 
shall  be  included  in  or  attached  to  the  return,  that  all  the 
securities  must  be  inventoried  by  the  same  method,  and 
that  such  method  must  be  adhered  to  in  subsequent  years 
unless  another  be  authorized  by  the  Commissioner  of  In- 
ternal Revenue. 

C.  Gain  or  loss  resulting  from  the  sale  or  disposition  of 
assets  inventoried  as  above  must  be  computed  as  the  dif- 
ference between  the  inventory  value  and  the  price  or  value 
at  which  sold  or  disposed  of. 

2.  In  all  other  cases  inventories  must  be  taken  at  cost 
or  at  value  as  of  March  i,  1913,  as  the  case  may  be. 

DANIEL  C.  ROPER, 
Commissioner  of  Internal  Revenue. 
APPROVED: 
W.  G.  McAooo, 
Secretary  of  the  Treasury. 

In  many  instances  the  construction  placed  by  the  Depart- 
ment upon  the  terms  " tangible  property"  and  "intangible 
Tangible  property"  will  determine  whether  or  not  a  par- 
fnd  *?"  ticular  asset  constitutes  invested  capital.  Ac- 
Property  cording  to  the  following  ruling  (T.  D.  2610)  stocks, 
Defined.  bonds,  bills  and  accounts  receivable  and  notes  and 
other  evidences  of  indebtedness  are  construed  to  be  tangible 
property. 

Washington,  D.  C.,  December  20,  1917. 
To  Collectors  of  Internal  Revenue,  Revenue  Agents  and  Others 
Concerned: 

The  term  " other  intangible  property"  as  used  in  sec- 
tion 207  will  be  construed  to  mean  property  of  a  character 
similar  to  good-will,  trade-marks,  and  the  other  specific 
kinds  of  property  enumerated  in  the  same  clause.  With 


WAR  EXCESS  PROFITS  TAX  169 

respect  to  property  not  clearly  of  such  a  character  rulings 
will  be  issued  as  occasion  may  demand  to  indicate  whether 
it  shall  be  regarded  as  tangible  or  intangible. 

To  date,  the  following  classes  of  property  have  been 
construed  to  be  tangible  property  within  the  meaning  of 
section  207: 
Stocks, 
Bonds, 

Bills  and  accounts  receivable, 
Notes  and  other  evidences  of  indebtedness. 

DANIEL  C.  ROPER, 
Commissioner  of  Internal  Revenue. 
APPROVED: 
W.  G.  McAooo, 
Secretary  of  the  Treasury. 

It  is  not  clear,  to  the  writer,  why  stocks  and  bonds,  by  law 
excluded  as  invested  capital,  the  income  from  which  is  not  sub- 
ject to  the  tax,  should  have  been  stated  in  the  foregoing  Treasury 
Decision,  unless  it  refers  to  cases  where  securities  are  dealt  in 
as  a  commodity,  or  where  an  original  issue  of  capital  stock  is 
paid  for  by  securities. 

It  has  been  held  by  the  Treasury  Department  that  for  the 
purpose  of  detennining  the  amount  of  net  income  subject  to 
the  Excess  Profits  Tax  where  actual  capital  is  em-  Salary  Al- 
ployed,  partnerships  and  individuals  will  be  al-  pa^£g£ to 
lowed  to  deduct  a  reasonable  amount  in  lieu  of  a  ships  and 
salary  compensation,  "not  in  excess  of  the  salary  Individuals 
or  compensation  customarily  paid  for  similar  service"  in  a  like 
or  similar  trade  or  business.  In  the  case  of  partnerships  such 
deduction  in  lieu  of  salary  compensation  will  be  allowed  whether 
or  not  a  previous  agreement  therefor  existed,  but  only  to 
March  i,  1918.  On  and  after  that  date  such  allowance,  hi  the 
case  of  partnerships,  will  only  be  permitted  where  provision 
for  the  same  is  made  by  partnership  agreement  and  where  the 
salaries  are  actually  paid  to  the  partners. 

In  both  cases  (partnerships  and  individuals)  the  person  cred- 
ited with  such  salary  allowance  must  make  an  individual 
return  and  pay  the  excess  profits  tax  at  the  8  per  cent.  rate. 
T.  D.  2611. 


1 70  INCOME  TAX — LAW  AND  ACCOUNTING 

Washington,  D.  C.,  December  20,  1917. 
To  Collectors  of  Internal  Revenue,  Revenue  Agents  and  Others 
Concerned: 

1.  In  computing  net  income  for  purposes  of  the  Excess 
Profits  Tax  a  partnership  will  be  allowed  to  deduct  as  an 
expense  reasonable  salaries  or  compensation  paid  to  in- 
dividual partners  for  personal  services  actually  rendered 
during  the  taxable  year,  if  payments  are  made  in  accord- 
ance with  prior  agreements  and  are  properly  recorded  on 
the  books  of  the  partnership.    In  no  case  shall  the  salaries 
or  compensation  so  deducted  be  in  excess  of  the  salaries 
or  compensation  customarily  paid  for  similar  services  under 
like  responsibilities  by  corporations  engaged  in  like  or 
similar  trades  or  businesses. 

With  respect  to  any  period  prior  to  March  i,  1918,  where 
no  previous  agreement  has  been  .made  as  to  salaries  or 
compensation  a  similar  deduction  will  be  allowed  for  serv- 
ices actually  rendered. 

In  the  case  of  a  foreign  partnership  the  deduction  shall 
be  limited  to  those  portions  of  salaries  or  compensation 
which  are  paid  for  services  rendered  with  respect  to  trade 
or  business  carried  on  in  the  United  States. 

A  partner  in  his  individual  capacity  is,  however,  subject 
to  the  excess  profits  tax,  if  any,  at  the  8  per  cent  rate  under 
section  209  with  respect  to  any  salary  or  compensation 
from  the  partnership  for  personal  services  (including  any 
amounts  allowed  to  the  partnership  as  a  deduction  for  the 
period  prior  to  March  i,  1918). 

2.  An  individual  carrying  on  a  trade  or  business  having 
an  invested  capital  may  designate  a  reasonable  amount 
as  salary  or  compensation  for  personal  service  actually 
rendered  by  him  in  the  conduct  of  such  trade  or  business. 
In  no  case  shall  the  amount  so  designated  be  in  excess  of 
the  salaries  or  compensation  customarily  paid  for  similar 
service  under  like  responsibilities  by  corporations  or  part- 
nerships engaged  in  like  or  similar  trades  or  businesses. 

In  the  case  of  a  non-resident  alien  individual,  the  amount 
shall  be  limited  to  that  portion  of  the  salary  or  compensa- 
tion which  is  for  service  rendered  with  respect  to  trade 
or  business  carried  on  in  the  United  States. 

An  individual  is,  however,  subject  to  the  excess  profits 
tax,  if  any,  at  the  8  per  cent  rate  under  section  209  with 
respect  to  the  amount  so  designated,  and  the  balance  of 


WAR  EXCESS  PROFITS  TAX  17 1 

the  income  derived  from  such  trade  or  business  shall  be 
subject  to  the  graduated  rates  prescribed  in  section  201. 

DANIEL  C.  ROPER, 
Commissioner  of  Internal  Revenue. 
APPROVED: 
W.  G.  McAooo, 
Secretary  of  the  Treasury. 

By  ruling  of  the  Department  (T.  D.  2612)  it  has  been  held 
that  a  partner,  with  respect  to  his  share  in  the  Profits  de- 
profits  of  a  partnership,  is  not  subject  to  the  Ex- 
cess  Profits  Tax.    As  stated  in  T.  D.  2611  (ante)  he  from 
is,  however,  liable  individually  for  such  tax  with  nerships. 
respect  to  any  salary  compensation  credited  or  paid  to  him. 

Washington,  D.  C.,  December  20,  1917. 
To  Collectors  of  Internal  Revenue,  Revenue  Agents  and  Others 
Concerned: 

A  partner  in  his  individual  capacity  will  not  be  con- 
sidered as  engaged  in  trade  or  business  with  respect  to  his 
share  in  the  profits  of  the  partnership,  and  consequently 
will  not  be  subject  to  excess  profits  tax  thereon.  He  is, 
however,  subject  to  the  excess  profits  tax,  if  any,  at  the 
8  per  cent,  rate  under  section  209  with  respect  to  any  salary 
or  compensation  from  the  partnership  for  personal  services 
(including  any  amounts  allowed  to  the  partnership  as  a 
deduction  for  the  period  prior  to  March  i,  1918). 

DANIEL  C.  ROPER, 
Commissioner  of  Internal  Revenue. 
APPROVED: 
W.  G.  McAooo, 
Secretary  of  the  Treasury. 

Interest  paid  by  a  partnership  to  a  partner  on  a  bona  fide 
loan  to  such  partnership  may  be  deducted  as  a  interest  on 
partnership  expense.     Interest  upon  capital  is  not  Loans  by 
deductible.    T.  D.  2613.  Partners. 

Washington,  D.  C.,  December  20,  1917. 
To  Collectors  of  Internal  Revenue,  Revenue  Agents  and  Others 
Concerned: 

In  computing  net  income  for  the  purpose  of  the  excess 
profits  tax  a  partnership  will  be  allowed  to  deduct  amounts 


172  INCOME  TAX — LAW  AND  ACCOUNTING 

paid  during  the  year  to  an  individual  partner  as  interest 
upon  any  bona  fide  loan,  but  no  deduction  for  so-called 
interest  upon  capital  will  be  recognized. 

DANIEL  C.  ROPER, 
Commissioner  of  Internal  Revenue. 
APPROVED: 
W.  G.  McAooo, 
Secretary  of  the  Treasury. 

Where  an  individual,  partnership  or  corporation,  engaged  in 
business  during  the  prewar  period,  is  content  to  accept  the 
Return  minimum  deduction  of  7  per  cent,  upon  invested 
Prewar  capital  for  the  taxable  year,  it  is  not  necessary  to 
Period.  £ie  a  return  of  net  income  or  invested  capital  for 
the  prewar  years.  A  business  or  trade  employing  no  capital  or 
not  more  than  a  nominal  capital,  being  taxed  at  the  flat  rate 
of  8  per  cent,  is  not  required  to  report  income  or  invested  capital 
for  the  prewar  years.  T.  D.  2614. 

Washington,  D.  C.,  December  20,  1917. 
To  Collectors  of  Internal  Revenue,  Revenue  Agents  and  Others 
Concerned: 

For  the  purposes  of  the  excess  profits  tax,  a  return  of 
information  with  respect  to  the  invested  capital  and  net 
income  for  the  pre-war  period  will  not  be  required  of  a 
corporation,  partnership  or  individual  in  the  following 
cases: 

(1)  If  the  taxpayer  accepts  the  minimum  percentage, 
viz.,  7  per  cent,  as  percentage  to  be  used  in  computing  the 
deduction  under  section  203 ;  or 

(2)  If  the  trade  or  business  is  taxable  only  at  the  8  per 
cent,  rate  under  section  209. 

The  foregoing  must  not  be  construed  as  not  requiring  a 
return  of  information  as  to  all  facts  which  may  be  necessary 
for  the  ascertainment  of  the  capital  and  income  for  the 
taxable  year  whenever  such  a  return  is  required  by  the  Com- 
missioner of  Internal  Revenue. 

DANIEL  C.  ROPER, 
Commissioner  of  Internal  Revenue. 
APPROVED: 
W.  G.  McAooo, 
Secretary  of  the  Treasury. 


WAR  EXCESS  PROFITS  TAX  173 

INVESTED  CAPITAL 

No  ruling  has  been  made,  as  yet,  upon  the  relationship  of 
various  classes  of  bonds  payable  to  invested  capital.  By  pro- 
hibition of  law  borrowed  money  does  not  constitute  Bon(js  as 
invested  capital.  Proceeds  of  sales  of  bonds,  secured  Invested 
by  mortgage  upon  corporate  property,  are  borrowed  CaPital- 
money.  But  all  bonds  are  not  secured  by  mortgage;  in  many 
cases  a  debenture  bond  is  nothing  more  than  a  preferred  stock. 
Will  such  debentures  be  held  to  be  invested  capital,  or  will  pre- 
ferred stock  having  the  ear-marks  of  debentures  be  classed  as 
borrowed  money  and  excluded  as  invested  capital?  A  pre- 
ferred stock,  for  example,  that  is  redeemable  at  a  definite  time, 
is  cumulative  as  to  interest,  and  provides  for  preferences  as  to 
assets  in  the  event  of  dissolution,  in  effect,  is  a  debenture.  Is 
such  stock  invested  capital?  In  the  absence  of  a  ruling  to  the 
contrary  the  taxpayer  may  treat  the  same  as  invested  capital. 
In  the  writer's  opinion  certain  classes  of  bonds  are  equivalent 
to  preferred  capital  stock,  called  by  some  other  name,  as,  for 
example,  "debentures."  Special  rulings  should  be  obtained  in 
connection  therewith,  from  the  Treasury  Department  based 
upon  the  facts  of  the  particular  case. 

Where  the  business  of  an  individual  or  partnership  is  incor- 
porated and  the  owner  or  owners  receive  in  exchange  for  such 
business  both  stock  and  bonds,  the  bonds  so  issued  do  not  rep- 
resent, in  any  sense,  borrowed  money.  The  writer  ventures  to 
predict  that  under  such  circumstances,  where  the  stockholders 
are  also  the  bondholders,  under  certain  conditions  of  acquire- 
ment, bonds  will  be  held  to  be  invested  capital.  If  it  should 
be  so  ruled,  no  expenses  in  connection  with  such  bonds  should 
be  allowed  as  deductions  from  net  income;  the  interest  paid 
thereon,  for  example,  will  then  be  a  distribution  of  profits  and 
not  an  expense.  From  time  to  tune,  as  occasion  demands, 
rulings  will  be  made  upon  facts  submitted  to  the  Department. 
If  no  ruling  has  been  rendered,  at  the  time  of  making  inquiry 
of  the  collector,  upon  a  case  similar  to  that  presented  by  the 
inquirer,  application  for  a  special  ruling  should  be  made  upon 
the  facts  involved  in  such  case. 

Decided  injustice  will  result  unless,  by  regulation  or  new 


174  INCOME  TAX — LAW  AND  ACCOUNTING 

legislation,  provision  is  made  for  the  inclusion  of  actual  values 
of  property  as  invested  capital.  How  this  can  be  accom- 
plished under  existing  law  without  violating  its  ex-  Limitation 
pressed  provisions  is  now  engaging  the  minds  of  the  pr  ™^  °* 
Committee  of  Advisers  at  Washington.  That  regula-  at  jan/ 1,S 
tions  will  be  made  whereby  substantial  justice  may  1914. 
be  obtained  by  those  against  whom  a  technical  construction 
of  the  law  would  result  in  discrimination  and  inequality,  may 
be  assured.  In  order  to  obtain  such  substantial  justice,  how- 
ever, it  will  be  necessary,  in  many  cases,  to  demand  of  the 
Department  special  rulings  upon  the  peculiar  facts  involved. 
Beyond  question,  Congress  did  not  contemplate  penalizing  con- 
servative capitalization;  the  general  tenor  of  the  law  indicates 
a  purpose  to  distribute  the  burden  fairly  and  equitably. 


CHAPTER  VI 

DEPRECIATION 

Depreciation  is  a  deductible  allowance  in  the  ascertainment 
of  net  income  for  tax  purposes.  It  should  repre-  Deprecia- 

sent,  as  nearly  as  possible,  the  actual  deterioration  5on.Pf~ 

i_     i      •  •  -vi       r  ductible 

of  such  physical  properties  as  are  susceptible  of  from  in. 

wear  and  tear.    Obsolescence  is  not  now  recognized  as  come. 

an  element  of  loss  in  computing  depreciation  for  tax  purposes, 

but  loss  sustained  on  discarded  machinery  is  deductible. 

In  a  broad  sense  of  the  word  depreciation  means  a  reduction 
in  value  and  may  be  applied  to  all  kinds  of  property.  As  used 
in  the  income  tax  law,  however,  it  is  applicable  only  to  tangible 
property,  such  as  is  subject  to  wear  and  tear  and  exhaustion. 
Hence,  depreciation  will  be  allowed  as  a  deduction  from  revenue 
only  on  physical  properties,  such  as  buildings,  fixtures,  machin- 
ery, etc.  All  depreciation  to  be  deductible  must  be  actually 
charged  off  in  the  books  of  account  in  the  period  for  which 
it  is  claimed. 

There  are  several  methods  of  computing  rates  Methods  of 
of  depreciation,  the  most  common  of  which  are:  Computing 

1.  By  equal  instalments. 

2.  On  diminishing  values. 

The  first  method  is  ordinarily  used  where  the  property  de- 
preciated has  no  residual  value,  and  the  second  one  where  the 
property  has  a  residual  value.  Charging  off  equal  instalments 
is  most  commonly  employed  with  respect  to  all  properties, 
whether  they  have  a  residual  value  or  not,  and  only  that  method 
has  as  yet  been  suggested  or  approved  by  rulings  of  the  Treasury 
Department  or  court  decision  in  connection  with  deductions 
from  income  tax  returns. 

In  a  publication  issued  by  the  Federal  Trade  Commission 
recently,  on  the  subject  of  "Fundamentals  of  a  Cost  System 
for  Manufacturers,"  both  methods  are  approved  in  the  fol- 
lowing language:  "There  are  several  methods  of  determining 
the  amount  of  depreciation.  One  is  to  estimate  the  scrap  value 


176  INCOME   TAX — LAW  AND  ACCOUNTING 

and  deduct  this  figure  from  the  original  cost.  The  difference 
is  then  divided  by  the  estimated  life  of  the  machine  in  years, 
and  the  result  is  the  annual  depreciation  on  that  machine. 
A  modification  of  this  method  which  is  not  quite  as  simple, 
but  really  affords  no  difficulty,  is  after  ascertaining  the  amount 
to  be  charged  off  during  the  life  of  the  machine,  to  determine 
a  percentage  which,  when  applied  to  the  net  book  value  of  the 
machine,  will  leave  only  the  scrap  value  of  the  machine  on  the 
books  at  the  expiration  of  its  estimated  life. 

"To  illustrate:  If  the  initial  cost  of  a  machine  and  equipment  is 
$1,000  and  the  estimated  scrap  value  is  $200,  with  an  estimated 
life  of  ten  years,  then  $800  is  the  amount  that  must  be  charged 
into  cost  during  that  period,  or  $80  per  year.  To  attain  this  re- 
sult, by  using  the  net  value  of  the  machine  as  a  basis,  a  rate  of 
15  per  cent,  would  be  necessary,  which  would  make  the  deprecia- 
tion 15  per  cent,  on  $1,000,  or  $150  the  first  year;  15  per  cent,  on 
$850,  or  $127.50  the  second  year,  etc.  The  advantage  of  this 
method  in  the  interest  of  normal  costs  is,  that  the  decrease  in  de- 
preciation charges  is  ordinarily  offset  by  an  increase  in  repairs." 

Where  reserves  for  depreciation  are  used  in  conjunction 
with  the  "Diminishing  Value  Method"  the  amount  of  the 
reserve  set  aside  in  past  periods  should  be  deducted  from  the 
asset  account  before  the  depreciation  is  computed  thereon. 

The  most  approved  method  of  double  entry  bookkeeping 
favors  the  establishment  of  reserves  for  depreciation  instead 
Reserve  °^  reducing  the  balances  of  the  asset  account  in 
for  De-  the  ledger.  This  is  accomplished  by  journal  entry, 
preciation.  made  eitner  montnly  Or  at  the  end  of  the  fiscal 
period,  just  prior  to  closing  the  books  of  account,  as  follows: 

Depreciation $250.00 

To  Reserve  for  Depreciation  of  Furniture  and  Fixtures $250 .  oo 

Depreciation  at  10%  per  annum  on  Furniture  and  Fixtures  for 
the  year  1916.    (Book  value — cost — $2,500.) 

The  Depreciation  Account  is  closed  into  Profit  and  Loss 
Account  and  the  Reserve  for  Depreciation,  a  negative  account,1 
remains  open.  In  the  Statement  of  Assets  and  Liabilities  the 

1 A  negative  account  is  one  that  is  neither  an  asset  nor  a  liability;  it  quali- 
fies an  asset  account,  as,  for  example,  Furniture  and  Fixtures. 


DEPRECIATION  177 

Reserve  for  Depreciation  is  deducted  from  the  asset  account 
and  extended  at  the  net  amount,  as  follows: 

Furniture  and  Fixtures $2,500.00 

Less  Reserve  for  Depreciation  (10%) 250.00 

$2,250.00 

Although  not  essential,  it  is  advisable  to  keep  a  separate 
reserve  account  for  each  class  of  assets,  as:  Reserve  for  De- 
preciation of  Furniture  and  Fixtures,  Reserve  for  Depreciation 
of  Machinery,  Reserve  for  Depreciation  of  Buildings,  etc.  This 
separation  renders  more  accessible  the  amount  of  deduction  from 
the  respective  asset  accounts,  when  preparing  the  balance  sheet. 

A  Reserve  for  Depreciation  must  be  kept  separate  and  dis- 
tinct from  other  reserve  accounts  and  reserve  funds.  A  reserve 
fund  is  an  amount  set  aside  for  the  purpose,  among  Diverting 
others,  of  providing  an  available  asset  (cash  or  Reserves, 
readily  convertible  investment)  for  a  present  or  future  obliga- 
tion, as  a  renewal  of  plant  and  machinery.  The  creation  of 
such  fund  does  not  incur  the  reduction  of  surplus  or  profit  be- 
cause it  is  not  an  expense;  it  is  not  created  by  a  reduction  of 
revenue,  but  merely  a  conversion  of  profits  or  surplus.  Hence, 
a  reserve  fund  set  aside  for  amortization  of  bonds,  or  to  provide 
quick  assets  for  any  other  purpose,  is  not  a  competent  deduc- 
tion in  an  income  tax  return.  Nor  are  reserve  accounts  prop- 
erly deductible  except  in  so  far  as  they  are  a  reduction  of  the 
value  of  an  asset.  A  reserve  account  appearing  on  the  liability 
side  of  a  balance  sheet,  unless  represented  by  a  specially  in- 
vested fund  in  the  assets,  is  offset  by  all  the  assets  in  the  balance 
sheet.  But  a  "Reserve  for  Depreciation"  is,  technically,  neither 
a  reserve  fund  nor  reserve  account,  because  it  has  been  charged 
against  revenue  and  has  reduced  the  surplus.  To  be  a  true 
reserve  it  should  not  reduce  the  revenue  or  surplus.  There- 
fore, a  "Reserve  for  Depreciation"  is  nothing  more  than  an 
"allowance  for  depreciation"  and  should  never  be  stated  on 
the  liability  side  of  a  balance  sheet.  It  is  nothing  more  than 
a  negative  account,  a  reduction  of  the  book  value  of  a  par- 
ticular asset,  and  should  be  deducted  in  the  Statement  of 
Assets  and  Liabilities  from  the  asset  to  which  it  refers. 

Hence,  under  rulings  in  connection  with  the  income  tax,  a 


178  INCOME  TAX — LAW  AND  ACCOUNTING 

so-called  "Reserve  for  Depreciation"  should  not  be  diverted  to 
any  purpose  except  "making  good  the  loss  sustained  by  reason 
of  wear  and  tear,  exhaustion  *  *  *  of  the  property  with  respect 
to  which  it  was  claimed." 

Depreciation  may  only  be  charged  off  up  to  the  cost  of  the 
property  depreciated.  Should  depreciation,  for  any  reason, 
have  been  charged  off  in  excess  of  such  amount,  then  such  excess 
must  be  reported  as  income  (Art.  132,  Reg.  33). 

The  law  does  not  prescribe  rates  of  depreciation  because 
Rates  of  these  depend  upon  the  kind  and  class  of  property, 
Deprecia-  and  upon  the  conditions  under  which  the  property  is 
tion-  used.  Fixing  rates  of  depreciation  is  more  or  less 

arbitrary  at  best. 

The  fairness  of  rates  of  depreciation,  deducted  in  returns  of 
net  income,  are  questions  of  fact,  and  not  of  law;  that  is  to  say, 
such  questions  at  issue  in  a  court  of  law  would,  ordinarily,  be 
submitted  to  a  jury  for  determination. 

Technical  rate  fixing  is  a  question  on  which  there  are  diversi- 
fied opinions,  even  amongst  the  best  engineers.  But  engineers 
have  suggested  rates  for  various  classes  of  properties  that  work 
out  fairly  accurately  for  all  practical  purposes.  The  rates  men- 
tioned herein  are  suggestive  only.  They  are  based  upon  the 
experience  of  engineers  and  accountants. 

In  the  case  of  Hyman  Cohen  v.  John  Z.  Lowe,  Jr.,  Collector 
(234  Fed.  474),  tried  before  a  jury  in  the  United  States  District 
Buildin  s 1  Court  *or  tlie  Southern  District  of  New  York, 
Judge  Grubb  stated  that,  in  his  opinion,  depreciation 
on  a  building  should  be  based  upon  the  number  of  years  "the 
building  would  remain  in  a  condition  to  be  habitable  for  the 
uses  for  which  it  was  constructed  and  used.  .  .  .  The  annual 
depreciation  would  be  an  amount  represented  by  a  fraction 
having  one  (the  tax  year)  for  the  numerator  and  the  number 
of  years,  representing  the  ascertained  life  of  the  building,  as  the 
denominator."  Hence,  a  building,  estimated  to  remain  hab- 
itable and  fit  for  the  purposes  for  which  it  was  erected  for  a  term 
of  forty  years,  would  suffer  an  annual  depreciation  of  2^2  per 

1  The  Department  has  stated  (not  by  Treasury  Decision)  that  it  is  esti- 
mated that  the  probable  life  of  a  frame  building  is  25  years;  brick  building, 
35  years,  stone,  steel  or  concrete  building,  50  to  100  years.  A  taxpayer, 
however,  is  not  bound  by  these  estimates. 


DEPRECIATION  179 

cent.  In  the  Cohen  case,  just  cited,  the  plaintiff  (owner  of 
building)  claimed  a  depreciation  of  5  per  cent,  for  the  tax  year 
(1913).  The  Collector  of  Internal  Revenue  allowed  only  3  per 
cent.,  and  the  plaintiff  brought  an  action  to  enforce  his  claim  of 
5  per  cent.  The  jury  brought  in  a  verdict  that  they  considered 
3  per  cent,  an  adequate  allowance.  The  building  in  question 
was  a  New  York  apartment  house. 

Depreciation  is  allowed  only  on  the  cost  of  buildings  and  im- 
provements, not  on  the  land.  For  depreciation  and  other  pur- 
poses, buildings  and  land  should  be  carried  in  separate  accounts 
in  the  ledger.  If  the  separate  cost  of  buildings,  as  apart  from 
the  land,  is  not  ascertainable,  then  the  separate  value  of  im- 
provements, as  shown  by  the  real  estate  tax  assessments,  may  be 
used,  or,  the  value  of  buildings  and  improvements  may  be  es- 
timated as  at  March  i,  1913,  if  then  in  existence,  "provided  that 
the  value  placed  upon  such  buildings  shall  not  be  in  excess  of 
the  cost  of  such  buildings,  less  an  amount  measuring  the  de- 
preciation which  had  previously  been  sustained."  (T.  D.  2137.) 

To  measure  the  fairness  of  the  amount  on  which  depreciation 
has  been  deducted  on  buildings,  in  returns  of  net  income,  Inter- 
nal Revenue  Inspectors  have  made  comparison  with  the  amount 
of  fire  insurance  carried  thereon.  But  that,  for  obvious  reasons, 
is  not  a  fair  comparison. 

The  question  of  rate  of  depreciation  must  always  be  determined 
upon  the  conditions  governing  each  particular  case.  The  rate  on 
brick  buildings  varies  from  i>£  to  5  per  cent,  per  annum,  accord- 
ing to  construction  and  use  to  which  buildings  are  put.  A  factory 
building,  wherein  manufacturing  of  heavy  machinery  is  carried 
on,  may  suffer  a  larger  depreciation  than  5  per  cent,  per  annum. 

It  is  reasonable  to  assume  that  frame  buildings  are  subject 
to  a  larger  rate  of  depreciation  than  brick  or  concrete  buildings, 
because  of  having  a  shorter  period  of  usefulness.  The  rates 
on  frame  buildings  will  vary  from  il/2  to  7>£  per  cent.,  according 
to  construction  and  uses,  and  may  run  higher  hi  some  cases. 

In  estimating  the  life  of  a  building  for  the  purpose  of  deter- 
mining upon  a  rate  of  depreciation,  it  must  be  assumed  that 
the  property  is  maintained  in  proper  repair.    The  Building 
cost  of  repairs  and  expenses  of  upkeep  are  deductible  Repairs. 
items  in  a  return  of  net  income. 


l8o  INCOME  TAX — LAW  AND  ACCOUNTING 

Additions  to  buildings  or  any  expenditure  that  constitutes 
Additions.  an  increase  in  the  investment  therein,  such  as  per- 
Better-  manent  improvements  and  betterments,  are  not 
ments-  deductible. 

A  person  or  corporation  holding  premises  as  lessee,  for  a  term 
Additions  of  vears>  requiring  the  tenant  by  terms  of  the  lease  to 
to  Leased  make  all  repairs  and  improvements,  if  any,  has  the 
Property,  right  to  deduct  the  improvements  as  well  as  repairs 
from  his  or  its  gross  income.  Such  improvements  should  be 
prorated  over  the  period  of  the  lease.  The  repairs,  however, 
may  be  deducted  as  current  expenses. 

The  cost  of  buildings  erected  by  tenants  on  leased  ground, 
which,  upon  expiration  of  the  lease,  revert  to  the  landlord, 
Buildings  mav  ^e  prorated  over  the  period  of  the  lease  and 
Erected  by  deducted  as  an  expense  of  doing  business.  The 
Tenants.  amount  charged  off  (prorated)  should  be  deducted 
in  the  return  of  net  income  of  a  corporation  as  rent  paid. 

Ordinarily  business  concerns  capitalize  amounts  paid  for 
furniture,  fixtures  and  office  equipment;  that  is  to  say,  they 
Furniture  establish  a  Furniture  and  Fixture  Account  in  the 
and  ledger  and  charge  purchases  of  that  class  of  assets 

Fixtures.  to  Sucj1  account.  This  class  of  property  depreciates 
from  5  to  25  per  cent,  per  annum;  10  per  cent,  is  the  usual  charge 
where  renewals  are  added  to  the  account. 

An  uncommon  practice  is  to  charge  off  the  entire  cost  of  re- 
newals of  furniture  and  office  equipment  as  a  cost  of  doing  busi- 
ness. This  method,  in  the  case  of  Mutual  Benefit  Life  Insurance 
Company  v.  Herold  (198  Fed.  199),  was  approved.  It  was  there 
held  that  "Renewals  of  office  furniture  and  equipment"  were 
"expense  of  maintenance"  deductible  in  the  ascertainment  of 
net  income.  As  this  decision  deals  only  with  "renewals"  of 
such  equipment  it  would  not  apply  to  the  first  cost. 

Furniture,  fixtures  and  office  equipment  should  be  carried  in  a 
separate  ledger  account  from  office  supplies.  Office  equipment 
represents  a  fixed  asset,  whereas  office  supplies  is  an  expense 
account. 

Depreciation  on  a  dwelling  (residence)  occupied  by  the  owner 

Dwellin        himself   is  not  deductible;  on  dwellings  that  are 

held  for  investment,  however,  by  both  individuals 


DEPRECIATION  l8l 

and  corporations,  a  reasonable  charge  for  depreciation  is  al- 
lowed. 

"Reasonable  allowance  for  the  wear  and  tear  of  property 
arising  from  its  use  for  rental  purposes  may  be  claimed  as  a 
deduction,  but  no  claim  for  depreciation  should  be  made  on 
account  of  any  amount  of  expense  of  restoring  property  or  mak- 
ing good  the  exhaustion  thereof  for  which  a  deduction  is  claimed 
elsewhere  in  the  return."  (Letter  by  Commissioner  of  Internal 
Revenue  to  the  Corporation  Trust  Co.,  February  26,  1916.) 

Depreciation  on  farm  buildings,  other  than  those  occupied 
by  the  owner  himself,  may  be  deducted  from  in-  Farm 
come.    (T.  D.  2090.)  Buildings. 

A  reasonable  allowance  for  depletion  of  mines,  not  to  exceed 
the  market  value  in  the  mine  of  the  product  thereof  which  has 
been  mined  and  sold  during  the  year  for  which  the  Depletion 
return  and  computation  are  made,  will  be  allowed.  of  Mines. 
When  the  allowance  authorized  shall  equal  the  capital  originally 
invested  or  in  case  of  purchase  made  prior  to  March  i,  1913,  the 
fair  market  value  as  of  that  date,  no  further  allowance  for  deple- 
tion shall  be  made. 

Corporations  operating  mines  (including  oil  or  gas  wells) 
upon  a  royalty  basis  only  cannot  claim  deprecia-  Leased 
tion  because  of  the  exhaustion  of  the  deposit.  Mines  on 
(Art.  145,  Reg.  33.)  Royalty. 

In  the  case  of  oil  and  gas  wells  a  reasonable  allowance  for 
actual  reduction  in  flow  and  production  to  be  ascertained  not 
by  the  flush  flow,  but  by  the  settled  production  or  Depletion, 
regular  flow.     As  in  the  case  of  mines,  when  the  Oil  and 
allowance  authorized  for  depletion  shall  equal  the  Gas  WeUs- 
capital  originally  invested,  or  in  case  of  purchase  made  prior  to 
March  i,  1913,  the  fair  market  value  as  of  that  date, -then  no 
further  allowance  shall  be  made. 

Corporations  leasing  oil  or  gas  territory  shall  base  their 
depletion  deduction  upon  the  cost  of  the  lease,  Leased  Oil 
and  not  upon  the  estimated  value,  in  place  of  and  Gas 
the  oil  or  gas.    (Art.  144,  Reg.  33.)  Territory. 

The  rate  of  depreciation  on  timber  lands  should  be  such  as 


1 82  INCOME   TAX — LAW  AND  ACCOUNTING 

to  return  to  the  owner,  when  the  timber  has  been  exhausted, 
Timber  the  capital  originally  invested  therein,  except  if 
Lands.  the  property  was  acquired  prior  to  March  i,  1913, 
the  fair  market  value  as  of  that  date. 

There  are  so  many  different  classes  and  kinds  of  machinery 
that  it  would  be  well-nigh  impossible  to  fix  a  rate  of  depreciation 
Machiner  l  ^at  wou^  uniformly  apply  to  all  classes.  L.  R. 
Dicksee,  an  English  accountant  of  recognized  ability, 
in  his  work  on  "Depreciation,  Reserves  and  Reserve  Funds," 
has  suggested  annual  rates  of  depreciation  on  machinery,  based 
on  diminishing  values,  as  follows: 

General  machinery 7^  to  10  per  cent. 

Special  machinery 10      to  25  per  cent. 

To  facilitate  the  computing  of  depreciation  on  a  variety  of 
classes  of  machinery,  it  is  advantageous  to  classify  them  ac- 
cording to  expected  life,  and  then  to  compute  the  depreciation  on 
each  class  accordingly. 

The  scrap  or  residual  value  of  machinery  should  be  taken  into 
consideration  in  arriving  at  rates  of  depreciation. 

There  is  a  diversity  of  opinion  as  to  the  rate  of  depreciation 
Boilers,  to  which  engines  and  boilers  are  subject.  Dicksee 
Engines.  suggests  annual  rates,  on  a  diminishing  value,  as 
follows: 

Engines  (in  general) 10     to  12^  per  cent. 

Boilers 12^  to  20     per  cent. 

George  M.  Craven,  whose  tables  of  depreciation  have  been 
adopted  by  commissions  passing  upon  rate  cases,  and  who  errs 
on  the  conservative  rather  than  the  liberal  side,  based  on  cost 
(not  diminishing  value)  per  annum,  suggests  the  following  rates: 

Steam  engines 3      to    6.6  per  cent. 

Boilers 3 . 5  to  10     per  cent. 

Composite  opinions,  however,  are  that  engines  and  boilers,  if 
maintained  in  a  proper  state  of  repair,  which  necessarily  must  be 
assumed,  should  last,  in  the  absence  of  unfavorable  conditions, 
about  ten  years,  and  would  be  subject  to  an  average  depreciation 

xThe  Internal  Revenue  Bureau  has  stated  (not  by  Treasury  Decision) 
that  "the  estimated  lifetime  of  ordinary  machinery  is  ten  years."  The 
taxpayer  is  not  bound  by  this  estimate. 


DEPRECIATION  183 

of  10  per  cent,  per  annum.  If  unfavorable  conditions  prevail, 
they  would  naturally  be  replaced  oftener  and  the  rate  of  de- 
preciation would  be  proportionately  higher. 

Article   131   of  Treasury  Department  Regulations  No.  33 
states  that  "  Incidental  repairs  which  neither  add  to  R 
the  value  of  the  property  nor  appreciably  prolong  its 
life,  but  keep  it  in  an  operating  condition,  may  be  deducted  as 
expenses."    Notwithstanding  the  apparent  clearness  Replace- 
of  this  regulation,  there  have  been  many  contro-  nwnts. 
versies  between  Collectors  of  Internal  Revenue  and  taxpayers 
as  to  what  constitutes  "incidental  repairs."    Rulings  on  the 
subject  have  recommended  the  establishment  of  reserves  for 
depreciation  and  directed  that  to  such  reserve  accounts  should 
be  charged  "  the  cost  of  renewing  or  replacing  the  property  with 
respect  to  which  the  depreciation  is  claimed."    But  it  is  not  in- 
tended that  " incidental  repairs"  that  merely  "keep  it  in  operat- 
ing condition"  shall  be  so  charged,  because,  under  the  above 
regulation,  such  expenses  are  separately  deductible  from  income. 

The  main  object  and  purpose  of  charging  off  depreciation 
is  not  to  provide  a  fund  out  of  which  to  make  repairs,  but  in 
the  case  of  a  machine,  for  example,  to  provide  for  the  replace- 
ment of  such  machine  when  it  has  served  its  usefulness. 

The  income  tax  law  contemplates  more  than  a  mere  renewal 
and  repair  reserve  because  it  specifically  permits  the  deduction 
of  "All  the  ordinary  and  necessary  expenses  paid  within  the 
year  in  the  maintenance  and  operation  of  its  business  and 
properties  .  .  .  ,"  as  well  as  "a  reasonable  allowance  for  the 
exhaustion,  wear  and  tear  of  property  arising  out  of  its  em- 
ployment in  the  business  or  trade."  These  are  separate  and 
distinct  provisions,  first  for  necessary  expenses,  which  must 
include  repairs,  and,  second,  for  depreciation. 

It  may  be  true  in  respect  to  a  machine,  or  any  other  prop- 
erty, which  is  periodically  wholly  rebuilt,  that  the  depreciation 
is  very  small,  but  that  it  suffers  some  degree  of  depreciation 
is  axiomatic.  Whether,  however,  the  cost  of  such  renewals 
should  be  charged  to  the  reserve  for  depreciation  or  to  an  ex- 
pense account,  should  depend  upon  the  adequacy  of  the  rate 
of  depreciation  charged  off.  Hence,  in  fixing  upon  rates  of 
depreciation  it  should  be  predetermined  whether  renewals  will  be 


184  INCOME  TAX — LAW  AND  ACCOUNTING 

charged  against  the  reserve  for  depreciation  or  to  an  expense  ac- 
count. Regardless  of  which  method  is  adopted  the  accumulation 
of  depreciation  reserved  should  be  such  an  amount  as  will  equal 
the  cost  of  the  property  upon  the  termination  of  its  usefulness. 

Shafting,  based  upon  a  diminishing  value,  has  been  esti- 
Shafti  mated  to  suffer  depreciation  at  the  rate  of  5  to  7^ 
per  cent,  per  annum. 

Small  tools  should  be  charged  to  a  separate  account  in  the 
ledger.  Physical  inventories  should  be  taken  periodically  and 
the  account  written  down  to  the  amount  of  such 
inventory.  The  difference  between  the  book  value 
and  the  physical  inventory  value  should  be  charged  to  deprecia- 
tion, and  in  the  course  of  tune  it  should  be  possible  to  determine 
upon  an  average  rate  of  depreciation  that  will  answer  all  practical 
purposes.  Such  average  rate  should,  however,  from  time  to  time, 
be  verified  by  physical  inventories.  This  principle  may  be  ap- 
plied to  all  items  that  are  being  constantly  used  up  and  replaced. 

Inasmuch  as  the  rates  of  depreciation  suggested  by  Craven 
Miscel-  have  been  adopted  by  various  industrial  concerns 
EioiiS^8  anc^  commissi°ns>  they  are  worthy  of  consideration, 
ment.  They  are,  however,  by  many,  considered  too  low 

and  are  stated  here  only  as  suggestive  of  the  most  conservative 
annual  rates: 

Shop  Equipment 3  to  15  per  cent. 

Motors 4  to  10  per  cent. 

Storage  Batteries 5  to  n  per  cent. 

Belted  Generators 3 . 3  to  10  per  cent. 

Switchboards,  etc 2  to  10  per  cent. 

Wires  and  Cables 2  to    6.6  per  cent. 

Steam  Piping 3 . 5  to  10  per  cent. 

Steam  Turbines 5  to    9  per  cent. 

Auxiliaries 5  to  10  per  cent. 

Laundry  The  equipment  of  laundries  is,  ordinarily,  sub- 

Equip-  ject  to  an  annual  depreciation  of  from  7^  to  15 
ment.  per  cent  Qf  ^  cost 

Patterns  are  made  of  so  large  a  variety  of  materials  and 
used  so  differently,  that  each  case  will  have  to  be  decided  ac- 
cording to  the  particular  requirements.  Patterns  that  are  con- 


DEPRECIATION  185 

tinuously  used  and  must  be  replaced  often  may  properly  be 
charged  off  at  once  as  a  cost  of  production.    Special  pattera 
patterns  should  always  be  charged  direct  to  the  job 
for  which  they  were  made. 

Dicksee  suggests  annual  rates,  based  on  diminishing  values, 
of  25  to  33x/3  per  cent. 

But  there  can  be  no  obligation  on  the  part  of  the  manufac- 
turer to  capitalize  any  expenditure  unless  it  is  unquestionably 
a  capital  expense. 

Accountancy  maintains  (some  accountants  to  the  contrary 
notwithstanding)  that  where  there  is  a  reasonable  doubt  as 
to  whether  an  expenditure  is  a  capital  or  expense  item,  it  should 
be  charged  against  revenue.  That  precludes  questionable 
items  entering  a  balance  sheet,  and  indicates  a  business  policy 
with  which  no  law  should  be  at  variance. 

Patents  are  issued  in  the  United  States  for  a  period  of  seven- 
teen years.     It  is  customary  for  manufacturing  corporations, 
operating  under  patent  rights,  to  capitalize  all  direct  p 
expenses  in  connection  with  obtaining  patents  either 
by  their  own  application  to  the  Patent  Office  or  by  purchase. 

In  case  the  corporation  itself  procures  the  patent,  it  has  the 
right  to  deduct  depreciation  annually  at  the  rate  of  1/17  of 
the  total  cost,  including  experimental  work,  cost  of  models 
and  drawings,  fees  of  the  Patent  Office,  legal  expenses,  and 
all  direct  charges  in  connection  therewith. 

If  the  patent  is  purchased  by  the  corporation,  then  the  de- 
preciation would  be  based  on  the  cost  thereof  and  the  rate  would 
be  fixed  according  to  the  length  of  time  that  the  patent  had  still 
to  run;  for  instance,  a  patent  purchased  for  $10,000,  that  had 
been  issued  seven  years  prior  to  its  purchase,  having  a  remaining 
life  of  ten  years,  would  be  subject  to  an  annual  depreciation 
of  10  per  cent,  of  the  cost,  amounting  to  $1,000.  This  amount 
would  be  a  competent  annual  charge  against  gross  income. 

The  principles  stated  with  respect  to  patents  are  true  also 
as  to  copyrights,  except  that  copyrights  are  issued  for  the 
period  of  twenty-eight  years.    A  more  conservative  method, 
in  the  case  of  copyrights,  however,  is  to  estimate  -       .  .  t 
the  period  of   salability  of   the  subject  of  copy- 
right and  prorate  the  amount  to  be  charged  off  accordingly. 


1 86  INCOME   TAX — LAW  AND  ACCOUNTING 

Automobile  trucks  deteriorate  according  to  the  severity  of 
the  use  to  which  they  are  subjected.  The  life  of  a  motor,  used 
Auto  for  trucking  purposes,  receiving  reasonable  care 

Trucks.1  and  properly  maintained,  may  be  estimated  to  be 
from  three  to  six  years.  As  with  other  property,  the  rate  of 
depreciation  is  fixed  according  to  its  life.  The  life  of  an  auto 
truck  is  such  a  length  of  time  as  it  remains  fit  for  the  purpose 
for  which  it  was  acquired.1 

The  annual  rate  applicable  to  auto  trucks  will  vary  from  15  to 
50  per  cent.  Based  on  a  replacement  value,  the  heaviest  depre- 
ciation occurs  during  the  first  year,  and  it  is  not  uncommon 
to  write  off  as  much  as  50  per  cent,  of  the  cost  during  that  time. 
Thereafter  the  rate  would  not  exceed  25  per  cent,  per  annum. 

The  most  accurate  and  conservative  method  is  to  appraise 
motor  trucks  at  the  end  of  each  year  and  to  write  off  the  shrink- 
age in  value  during  the  year  for  which  the  return  of  net  income 
is  computed.  This  method,  being  based  on  actual  facts,  can- 
not be  objectionable  for  income  tax  purposes. 

All  costs  of  repairs,  replacements  or  parts,  tires,  overhauling, 
painting,  supplies,  gas,  oil,  licenses  and  insurance,  in  connec- 
tion with  auto  trucks  are  deductible  expenses  in  the  return  of 
net  income. 

Depreciation  on  horses  varies  so  widely  that  each  concern 
H  should  work  out  its  own  table  of  experience  for 

depreciation  purposes.  Rather  than  to  guess  at 
an  arbitrary  rate  of  depreciation,  it  is  advisable  to  revalue 
Stable  horses  at  the  end  of  each  fiscal  period.  The  loss 
Equipment.  jn  value  during  the  tax  year  may  then  be  deducted 
as  depreciation,  and,  in  the  course  of  time,  it  will  be  possible 
to  formulate,  fairly  accurately,  the  rate  of  depreciation  to  which 
horses,  in  the  particular  business,  are  subject.  It  may  be  said 
that,  ordinarily,  the  rate  of  depreciation  on  horses  will  vary 
from  15  to  25  per  cent,  of  their  cost. 

Stable  equipment  usually  suffers  a  depreciation  of  from  7^ 
to  15  per  cent,  per  annum. 

Depreciation  of  good  will  is  not  allowed,  because  it  is  an 

1  The  Internal  Revenue  Bureau  has  stated  that  it  is  estimated  that  the 
life  of  automobiles  used  for  business  or  farm  purposes  and  farm  tractors  is 
four  to  five  years.  Taxpayers  are  not  bound  by  this  estimate. 


DEPRECIATION  187 

intangible  asset  that  cannot  suffer  loss  by  reason  of  "wear 
and  tear. "  From  an  accounting  point  of  view,  the  _-  WiU 
practice  of  "writing  down"  the  book  value  of  good 
will  is  not  an  unusual  one  in  periods  of  prosperity.  Its  purpose 
is,  primarily,  to  reduce  the  book  assets  to  tangible  properties 
and  thereby  give  the  balance  sheet  a  healthier  appearance. 
The  practice,  although  commendable,  and  perhaps  a  sign  of 
conservative  management,  does  not  permit  of  a  deduction  in 
the  income  tax  return.  As  a  matter  of  bookkeeping,  such  a 
charge  would  be  a  reduction  of  Surplus  Account  and  not  of 
Profit  and  Loss  Account  for  any  particular  period  of  time. 

No  rule  for  charging  off  good  will  can  be  laid  down,  because 
in  a  flourishing  business,  the  good  will  is  of  proportionate  value 
and  should  not,  in  theory,  be  reduced;  whereas,  in  periods  when 
no  profits  are  being  earned,  the  value  of  good  will  diminishes, 
but  then  there  is  no  profit  out  of  which  to  reduce  the  Good  Will 
Account.  Hence,  at  best,  the  reduction  of  good  will  is  a  purely 
arbitrary  matter  that  bears  no  relation  to  an  income  tax  return.1 

Stocks  and  bonds  fluctuate  in  value.    A  downward  fluctua- 
tion, if  permanent,  may  be  said  to  be  depreciation,  Invest- 
but  such  is  not  deductible  for  income  tax  purposes.2  ments. 
Losses  to  become  deductible  must  be  actually  sustained  by 
completed  and  closed  transactions.    A  mere  reduc-  Stocks  and 
tion  hi  book  value  by  direction  of  a  board  of  direc-  Bonds, 
tors,  or  even  an  order  by  the  State  or  Federal  Banking  De- 
partment, to  reduce  or  write  off  securities,  does  not  establish 
a  loss  that  constitutes  a  deduction  from  taxable  income.  "Losses 
of  this  character  are  only  ascertainable  when  the  securities 
mature,  are  disposed  of,  or  canceled."    (T.  D.  2152.) 

No  arbitrary  reduction  of  capital  assets  on  the  books  of  a 
corporation  or  individual  shall  justify  a  deduction  from  income 
for  tax  purposes.  Conversely,  the  appreciating  or  "  writing 
up,"  of  capital  assets  to  conform,  for  instance,  with  appraisal 
values,  does  not  make  such  increase  taxable  as  income.  (Bald- 
win Locomotive  Works  v.  McCoach,  221  Fed.  59.)  There  must 
be  an  actual  realization  of  the  enhanced  value  by  a  sale  for 

1  As  to  valuation  of  good  will  for  invested  capital,  see  p.  138. 
*  A  dealer  in  securities  may  inventory  the  same  at  cost  or  at  cost  or  market 
price,  whichever  is  the  lower.    (T.  D.  2609.) 


1 88  INCOME   TAX — LAW  AND  ACCOUNTING 

cash,  or  its  equivalent,  in  order  to  make  the  increase  taxable 
as  income. 

Theatrical  costumes  may  be  depreciated.  The  rate  should 
be  based  on  the  life  of  garment  or  time  allowed  for  production 
Theatrical  of  play,  whichever  is  the  shorter.  Wearing  apparel, 
Costumes,  serving  both  the  purpose  of  personal  and  theatrical 
use,  may  not  be  depreciated  for  the  purpose  of  income  tax. 
Trade-  Neither  trade-marks  nor  brands,  acquired  by 

marks.  purchase  or  otherwise,  are  subject  to  depreciation, 
and  no  allowance  for  income  tax  purposes  will  be 
made  thereon. 

In  the  case  of  resale  of  trademarks  or  brands,  a  loss  actually 
sustained  would  be  deductible,  as  a  capital  loss.  A  profit,  on 
the  other  hand,  would  be  returnable  as  income. 

If  the  trade-mark  or  brand  was  acquired  prior  to  March  1,1913, 
then  the  profit  or  loss  in  the  sale  thereof  would  be  computed 
on  the  basis  of  the  fair  market  value  as  of  that  date  and  not  on 
the  basis  of  cost.  This  applies  to  the  sale  of  all  capital  assets  ac- 
quired prior  to  the  incidence  of  the  income  tax  law,  March  1,1913. 

The  cost  of  registering  trade-marks  and  brands,  being  nominal, 
should  be  included  in  the  expense  of  doing  business.  Should 
such  an  item  be  capitalized  it  would  not  be  deductible  as  an 
expense  in  a  subsequent  year. 

By  rulings  of  the  Treasury  Department  no  allowance  for 
depreciation  is  permitted  on  inventories  of  stock  on  hand.1 
Stock  on  It  has  been  held  "  that  depreciation  will  not  be 
Hand.  allowed  in  the  return  or  inventory,  on  merchandise, 
as  the  same  will  be  reflected  in  the  income  in  the  year  of  its 
disposal."  Also,  as  directed  in  the  supplementary  statement  of 
the  return,  "  In  case  the  annual  gain  or  loss  is  determined  by  in- 
ventory, merchandise  must  be  inventoried  at  the  cost  price  .  .  ." 
This  is  based  upon  the  theory  that  no  actual  loss  is  sustained 
until  the  goods  are  sold. 

These  rulings  are  contrary  to  the  well-settled  principles  of  ac- 
counting, that  when  the  market  value  of  merchandise  is  less  than 
the  cost,  the  market  value  should  prevail  for  inventory  purposes. 

1  By  more  recent  ruling  (T.  D.  2609,  Dec.  19,  1917)  inventories  may  now 
be  computed  at  cost  or  at  cost  or  market  price,  whichever  is  the  lower.  See 
page  167. 


DEPRECIATION  189 

A  merchant  who  commits  an  error  of  judgment  in  buying 
merchandise  should  be  permitted  to  apportion  his  loss  over 
the  periods  during  which  he  is  obliged  to  carry  the  unsalable 
goods  in  stock.  In  some  lines  of  business  the  ruling  will  work 
a  hardship.  Publishers,  for  example,  who  must  carry  slow 
selling  stock  from  year  to  year,  a  large  part  of  which  eventually 
proves  unsalable,  will  be  piling  up  inflated  and  exaggerated  in- 
ventories of  stock  on  hand,  if  computed  at  cost.  No  law  should 
encourage  the  overstatement  of  values  of  assets  because  such 
overstatement  affects  the  rights  of  creditors  who  rely  on  the 
representations  of  financial  statements  as  a  credit  basis.  Be- 
sides, under  State  laws,  the  overstatement  of  assets  is  pun- 
ishable as  a  mispresentation  of  facts.  Nor  is  the  ruling  that 
inventories  must  be  computed  at  cost  consistent  with  conserva- 
tive business  methods. 

It  is  noteworthy  that  the  Federal  Trade  Commission  in  a 
pamphlet  issued  on  July  i$th,  1916,  entitled  "A  System  of 
Accounts  for  Retail  Merchants"  for  the  purpose  of  " Aiding 
retail  merchants  to  improve  their  accounting  methods"  on  the 
subject  of  depreciation,  states:  "No  merchant  can  be  said  to  be 
managing  his  business  properly  unless  adequate  provision  is 
made  for  depreciation."  As  to  depreciation  on  merchandise, 
under  the  title  of  "Profit  and  Loss  Account"  it  says:  "  A  physical 
inventory  should  be  taken  at  least  once  a  year.  The  basis  should 
be  cost  with  conservative  deduction  for  obsolete  and  shelf- 
worn  goods."  A  perusal  of  the  proforma  Profit  and  Loss  Ac- 
count, contained  on  page  18  of  the  pamphlet,  discloses  a  deduc- 
tion from  inventory  designated  "Less  Stock  Depreciation"  of 
an  amount  equal  to  5  per  cent,  of  the  inventory  which  con- 
cededly  was  based  on  cost. 

The  only  danger  that  the  depreciation  of  inventories  would 
involve  in  connection  with  income  tax  returns,  is  the  possible 
manipulation  of  merchandise  values.  As  in  the  case  of  deprecia- 
tion of  capital  assets,  fixed  rates  could  not  be  prescribed  to 
cover  all  cases,  but  manipulation  of  inventories  for  the  purpose  of 
showing  a  smaller  gross  income  than  was  actually  earned  could 
be  prevented  by  requiring  detailed  information  as  to  how  the 
inventory  was  computed,  rate  of  depreciation  deducted,  etc. 

Until  there  has  been  a  court  adjudication  upon  the  prescribed 


1 90  INCOME  TAX — LAW  AND  ACCOUNTING 

ruling  of  computing  inventories,  stock  on  hand  should  be  valued 
at  cost.  In  cases  where  the  inventory,  taken  at  cost,  results  in  an 
inflated  or  overstated  "net  income,"  it  is  recommended  that  the 
individual  or  company  aggrieved  place  all  the  facts  of  his  or  its 
case  in  writing  before  the  Commissioner  of  Internal  Revenue, 
Washington,  D.  C.,  or  the  collector  of  his  or  its  district,  and  ask 
for  a  special  ruling  thereon.1 

Many  machine  shops  and  factories  engaged  in  manufacturing 
various  classes  of  war  materials  have,  during  recent  months, 
Munitions  increased  their  capital  and  enlarged  their  plants  for 
War  Ma-  ^e  P111?036  °f  extending  their  output.  Some  of 
terials.  these  concerns  have  not  only  borrowed  capital  but 
have  reinvested  their  current  profits  in  additions  and  improve- 
ments without  regard  to  their  forthcoming  obligations  to  the 
Government  by  reason  of  war  income  and  excess  profits  taxes 
and  without  serious  consideration  of  the  questionable  usefulness 
of  their  additions  and  improvements  at  the  close  of  the  present 
exceptional  activities.  This  is  a  matter  of  which  the  Govern- 
ment might  well  take  due  notice  with  the  view  of  fairly  compen- 
sating those  who  have  committed  themselves  by  obligations,  the 
payment  of  which,  in  some  cases,  will  leave  them  with  but  an  over 
extended  plant  for  which  there  may  be  little  or  no  future  need. 

In  Great  Britain  liberal  provision  has  been  made  by  Regula- 
tions under  the  Munitions  of  War  Acts  for  extra  allowances  for 
depreciation,  the  return  of  capital  expenditures  incurred  par- 
ticularly for  munitions  purposes,  increased  salaries  of  manage- 
ment, and  other  important  matters. 

The  following  are  copies  of  Regulations  issued  under  the 
Munitions  of  War  Acts  of  Great  Britain,  as  contained  in  "  Excess 
Profits  Duty"  by  Mr.  W.  E.  Snelling  (London,  1916): 

In  determining  the  net  profits  for  any  period  of  assess- 
ment, due  consideration  shall  be  given  to,  and  any  appro- 
priate adjustments  may  be  made  in  respect  of  all  or  any  of 
the  following  matters,  that  is  to  say — 

(a)  Exceptional  wear  and  tear  of  plant,  buildings  and 
machinery; 

(b)  Capital  expenditure  specially  incurred  for  the  pur- 
pose of  munitions  work; 

1  See  new  ruling  on  this  subject,  page  167. 


DEPRECIATION  1 9! 

(c)  The  probable  value  to  the  controlled  owner  at  the 
end  of  the  period  of  control  of  any  plant,  buildings  or  ma- 
chinery erected  or  installed  or  other  expenditure  incurred 
for  munitions  work,  since  the  4th  of  August,  1914; 

(d)  Special  provisions  or  terms  of  any  contracts  entered 
into  between  the  Government  and  the  controlled  owner; 

(e)  Any  exceptional  services  rendered  by  the  controlled 
owner  in  connection  with  the  controlled  establishment; 

(f)  Any  increase  in  salaries  or  other  emoluments  of  any 
persons  engaged  in  the  management  or  direction  of  the 
controlled  establishment  made  since  the  end  of  the  standard 
period,  or  any  steps  taken  since  the  end  of  that  period  which 
might  operate  to  decrease  net  profits; 

(g)  Generally  any  other  matter  which  may  appear  to 
the  Minister,  or  to  the  Referee,  as  the  case  may  be,  material 
to  be  taken  into  account. 

Any  such  adjustments  may  be  made  either  by  additions 
to  or  deductions  from  the  standard  amount  of  profits  or  by 
way  of  charges  or  disallowance  of  charges  against  profits  for 
the  period  of  assessment.  (Regulation  9.) 

In  ascertaining  or  determining  net  profits  for  the  final 
period  of  assessment  proper  adjustments  may  be  made  in 
respect  of  the  whole  period  of  control  in  regard  to  any  mat- 
ters referred  to  in  Rule  9,  so  far  as  it  may  then  be  shown 
that  sufficient  adjustments  have  not  been  made  in  re- 
gard thereto  in  ascertaining  or  determining  net  profits  for 
any  previous  period  or  periods  of  assessment.  (Regula- 
tion 12.) 

The  question  of  exceptional  wear  and  tear  of  machinery  and 
plant  sustained  by  reason  of  operating  them,  double  or  treble 
the  regular  working  time,  is  one  upon  which  special  rulings 
should  be  obtained  from  the  Commissioner  of  Internal  Revenue, 
Washington,  D.  C. 

It  seems  only  reasonable,  also,  that  the  Government  should 
devise  some  means  of  amortizing  the  capital  invested  in  under- 
takings where  the  plants,  especially  constructed  to  meet  imme- 
diate needs,  will  have  served  their  usefulness  at  the  close  of  the 
present  demands  for  them.  These  are  matters  about  which  the 
Commissioner  of  Internal  Revenue  should  be  addressed  direct, 
and  the  suggestion  is  made  with  confidence  that  such  requests 
will  receive  the  consideration  they  merit. 


IQ2  INCOME   TAX — LAW  AND  ACCOUNTING 

As  already  indicated,  rulings  hold  that  rates  of  depreciation 

should  be  computed  upon  the  estimated  life  of  property.     It  is 

a  question  whether  that  method,   applied   to  all 

classes  of  property,  is  based  upon  sound  reasoning. 

In  the  case  of  ships,  for  example,  the  rate  would,  more  accurately, 

be  computed  upon  the  estimated  period  of  service  than  upon 

the  duration  of  life. 

Rates  of  depreciation  of  ships  range  from  3  to  10  per  cent., 
according  to  construction. 

The  English  practice,  as  stated  by  Mr.  William  Sanders  1 
is  as  follows: 

"Allowances  in  respect  of  ships  have,  however,  been  prima 
facie  fixed  as  follows  by  the  Revenue: 

"Steamers  4  per  cent,  on  prime  cost. 

"Sailing  ships  3  per  cent,  on  prime  cost." 

He  defines  the  prime  cost  as  follows: 

"Prime  cost  is  the  original  cost  price,  plus  subsequent  capital 
expenditure,  and  the  allowance  is  not  to  exceed  the  total  prime 
cost  less  the  breaking  up  value  of  4  per  cent,  for  steamers  and 
3  per  cent,  for  sailing  vessels." 

Quoting,  also,  from  a  specific  case  2  mentioned  by  Mr.  Sanders: 

"The  Commissioners,  however,  arrived  at  twenty-eight 
years  as  being  the  duration  of  life  of  a  passenger  steamer, 
and  allowed  6  per  cent,  depreciation  on  the  diminishing 
value." 


Mr.  Sanders'  work  3  on  the  English  Income  Tax  contains  a 
very  comprehensive  table  of  rates  of  depreciation,  applicable 
to  various  industries,  which  rates  have  been  granted  by  the  Dis- 
trict Commissioners  in  the  districts  mentioned,  as  follows: 


1  "The  Practice  and  Law  of  Income  Tax  and  Super  Tax"  (1916). 

2  P.  and  O.  Steam  Navigation  Co.  v.  Leslie  (1900),  C.  A.  (82  L.  T.  137; 
4  Tax.  Cas.  177). 

8  "The  Practice  and  Law  of  Income  Tax  and  Super  Tax"  (1916)  by  Wil- 
liam Sanders. 


DEPRECIATION 


193 


Nature  of  industry  Rate  per  cent, 

and  district  of  allowance 

Boot  trade— Leicester  7# 

Brewers— Cardiff  5 

Collieries— Cardiff  5 
Coal  exporting  plant — 

Cardiff  5 
Dyers  and  trimmers — 

Leicester  7# 

do  10 

Engineers — Leicester  ^}4 

Cardiff  5 

Hosiery — Leicester  7>£ 


Nottingham  5 

Lace  making — Nottingham  5 

do  7 
Looms  and  spinning  machines — 

Huddersfield  5 

do  l 


Oldham  5 

do  7} 
Newspaper   and   printing — 

Dundee  10 

Glasgow  6 

do  6 

do  7J 


Nottingham 

Cardiff 

Cardiff 


do  15 


Remarks 

On  full  value 

On  written-down  value 

On  written-down  value 

On  written-down  value 

On  full  value 

If  justified  on  inquiry 

On  full  value 

On  written-down  value 

On  full  value  and  higher 
rate  if  justified  on  in- 
quiry 

On  fixed  machinery 

On  full  value 

On  written-down  value 

On  motive  plant 

On  spinning,  dyeing, 

carding,  and  finishing 

machinery 
On  engines,  boilers  and 

gearing 
On  spuming  machines 

On  printing  machinery 
running  double  shifts 

On  ruling  and  book- 
binding machines 

On  tvpe,  linotype  ma- 
chines, etc. 

To  include  renewal  of 
type  not  charged  to 
Revenue 

On  written-down  value 

On  written-down  value 

On  written-down  value 
for  newspaper  printing 
machines 

On  type 


194 


INCOME  TAX — LAW  AND  ACCOUNTING 


Nature  of  industry 
and  district 

Sewing  machines — Glasgow 
Nottingham 

Ship  repairing  and  ship- 
building plant — Cardiff 

Spinning  machinery  and 
woolcombs — Bradford 


Rate  per  cent, 
of  allowance 


10 
10 


Tramways— Glasgow 


Weaving— Bradford 
Blackburn 

do 
Huddersneld 


do 


Remarks 

On  machines  used  in 
clothing  factories. 

Replacements  all  charged 
to  capital. 

On   written-down   value 

On  written-down  value 
when  machinery  run- 
ning day  and  night. 
Allowance  reduced 
when  heavy  amount 
charged  for  repairs  and 
renewals 

Average  over  all  per  cent. 


Ducts  3 

Cables  3 

Poles  and  rosettes  2 
Section  boxes  3 

Telephones  5 

Depot  fittings  2 

Electric  power  plant  5 
Sub-stations  plant  5 
Car  works 

machinery  7^ 

Permanent  way 

plant  1*6 

Rolling  stock  5 

Punches  7>£ 

Furniture  5 

5  On  looms 

5  On  fixed  boilers,  engines, 

and  fixed  machinery 
7>£  On  loose  machinery,  etc. 

7#  On    spinning,    weaving, 

carding,  finishing  and 
condensing  machinery 
5  On  motive  plant,  shaft- 

ing, etc. 
"On  full  value"  would,  ordinarily,  be  equivalent  to  the  cost. 


DEPRECIATION  1 95 

"On  written-down  value"  refers  to  the  diminishing  value. 
(See  page  175.) 

Like  all  rates  of  depreciation  stated  herein,  those  contained 
in  the  foregoing  table  are  suggestive  only.  They  are  particularly 
valuable,  however,  in  that  they  are  drawn  from  actual  Income 
Tax  experience. 

Where  it  is  found  that  an  excessive  rate  of  depreciation  was 
Adjusting  deducted  in  past  years,  amended  returns  may  be 
Excess  De-  filed  for  such  years  and  the  additional  tax  will  be 
preciation.  assessed  without  penalty. 

"This  office  is  in  receipt  of  your  letter  of  the  8th  instant, 
in  which  you  state  that  a  corporation  in  its  returns  for  the 
years  1911,  1912  and  1913  claimed  depreciation  of  i2>£% 
on  the  value  of  its  machinery;  that  in  1917  an  income  tax 
inspector  examined  the  books  and  recommended  that  de- 
preciation at  the  rate  of  5%  be  allowed  and  as  a  result, 
additional  taxes  were  assessed  against  the  corporation  for 
the  years  1911,  1912  and  1913,  based  upon  the  increase 
in  net  income  resulting  from  the  reduction  of  depreciation 
from  i2>2  to  5%;  and  that  another  corporation  engaged  in 
the  same  line  of  business  and  using  the  same  kind  of  ma- 
chinery charged  off  12^%  for  depreciation  on  the  same, 
but  the  books  of  this  corporation  were  never  examined  and 
you  ask  what  penalty,  if  any,  the  latter  company  will  be 
required  to  pay  for  the  years  1911,  1912  and  1913  if  it 
now  makes  a  claim  that  its  calculations  for  such  years  were 
based  on  an  excessive  rate  of  depreciation. 

In  reply,  you  are  informed  that  no  penalty  will  attach  to 
the  corporation  if  it  files  amended  returns  reducing  its 
depreciation  deduction  from  i2>£  to  5%  on  its  machinery. 
The  amended  returns  should  be  prepared  and  filed  with  the 
Collector  of  Internal  Revenue  for  its  district  with  a  letter 
of  transmittal,  stating  the  reason  the  amended  returns 
were  filed.  The  Collector  will  then  notify  this  office  and 
an  additional  tax  of  i%  will  be  assessed  against  the  cor- 
poration due  to  the  increase  in  its  net  income  on  account 
of  the  reduction  of  its  depreciation  deduction  from  i2>£ 
to  5%."  (Extract  from  letter  to  the  First  National  Bank, 
Cleveland,  Ohio,  by  Deputy  Commissioner  L.  F.  Speer, 
dated  Nov.  16,  1917,  published  in  the  Income  Tax  Service 
of  the  Corporation  Trust  Co.) 


CHAPTER  VII 

BOOKKEEPING  SUGGESTIONS 
PREPARATION  OF  INCOME  TAX  RETURNS  OF  CORPORATIONS 


amended  law  contains  a  provision  in  regard 
to  the  keeping  of  accounts,  as  follows: 

"A  corporation,  joint-stock  company  or  association,  or 
insurance  company,  keeping  accounts  upon  any  basis 
other  than  that  of  actual  receipts  and  disbursements,  un- 
less such  other  basis  does  not  clearly  reflect  its  income,  may, 
subject  to  regulations  made  by  the  Commissioner  of  Inter- 
nal Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury,  make  its  return  upon  the  basis  upon  which  its 
accounts  are  kept,  in  which  case  the  tax  shall  be  computed 
upon  its  income  as  so  returned." 

The  same  provision  is  made  with  respect  to  the  accounts  of 
individuals. 

This  permits  the  individual  or  corporation,  that  employs  a 
method  of  bookkeeping  from  which  a  return  cannot  be  pre- 
pared in  the  prescribed  form,  to  render  the  report  according  to 
the  method  of  bookkeeping  employed,  provided  only  that  the 
books  from  which  the  return  is  made  reflect  the  correct  income. 
The  return,  however,  must,  in  every  case,  be  made  on  the 
blank  provided  by  the  Government,  with  full  and  complete 
explanations  as  to  the  method  employed. 

The  dominant  and  foremost  requisite  in  the  preparation  of 
income  tax  returns  is  To  REPORT  THE  FACTS.  The  method 
employed  to  arrive  at  the  facts  is  of  considerable  importance, 
but  secondary.  A  variance  from  the  prescribed  classification 
of  income  and  expenses  may  be  unavoidable;  a  deliberate  dis- 
regard of  the  facts,  by  either  omission  or  declaration,  is  tanta- 
mount to  misrepresentation. 

The  income  and  expenses  should  be  classified  as  prescribed 


BOOKKEEPING  SUGGESTIONS  197 

by  the  return  unless  the  nature  of  the  business  is  such  that  it 
does  not  permit  of  such  classification  or  unless  the  books  of 
account  are  kept  hi  conformity  with  regulations  of  some  de- 
partment of  the  Government  requiring  the  keeping  of  books 
according  to  "uniform  systems  of  accounting,"  as  in  the  case 
of  corporations  coming  under  the  Interstate  Commerce  Com- 
mission. 

The  books  must  be  so  kept  that  each  and  every  item  set 
forth  in  the  return  of  annual  net  income  may  be  reach'ly  verified 
by  an  examination  of  the  books  of  account. 

"The  books  of  a  corporation  are  assumed  to  reflect  the 
facts  as  to  its  earnings,  income,  etc.    Hence  they  will  be 
taken  as  the  best  guide  in  determining  the  net  in-  Books  of 
come  upon  which  the  tax  imposed  by  this  act  is  Account 
calculated.   Except  as  the  same  may  be  modified  Best  Guide 
by  the  provisions  of  the  law,  wherein  certain  de-  to  ^c01116- 
ductions  are  limited,  the  net  income  disclosed  by  the  books 
and  verified  by  the  annual  balance  sheet,  or  the  annual  re- 
port to  stockholders,  should  be  the  same  as  that  returned 
for  taxation."     (Regulations  33,  Article  183.) 

"For  the  purpose  of  verifying  any  return,  made  pur- 
suant to  this  act,  the  Commissioner  of  Internal  Revenue 
may,  by  any  duly  authorized  revenue  agent  or  Examina- 
deputy  collector,  cause  the  books  of  such  corpo-  t*011  of 
ration  to  be  examined,  and  if  such  examination  2jg^Jy 
discloses  that  the  corporation  is  liable  to  tax  in  Revenue 
addition  to  that  previously  assessed,  or  assess-  Officers, 
able,  the  same  shall  be  assessed  and  shall  be  payable  imme- 
diately upon  notice  and  demand.    For  the  purpose  of  such 
examination,  the  books  of  corporations  shall  be  open  to  the 
examining  officer,  or  shall  be  produced  for  this  purpose  upon 
summons  issued  by  any  properly  authorized  officer."    (Reg- 
ulations 33,  Article  186.) 

Although  there  has  been  no  ruling  upon  specific  methods 
of  accounting  under  the  present  income  tax  law, 
it  is  clear  that  corporations  or  individuals  keeping 
accounts  upon  the  plan  of  accruing  income  and  expenses  or 
deferring   prepayments,  may  prepare  their  returns  Prepay- 
accordingly.     From  an  accounting  viewpoint  this  ments. 
is  the  only  correct  method  whereby  the  true  profit  or  loss  of 


1 98  INCOME   TAX — LAW  AND  ACCOUNTING 

a  business  may  be  deduced.  But  the  method,  if  employed, 
must  be  used  consistently  and  with  limitation.  In  no  case 
shall  an  expense  account  for  a  tax  year  or  fiscal  year  be  charged 
with  a  greater  amount  than  is  actually  incurred  or  accrued 
therein  and  for  which  the  business  has  received  value  in  such 
fiscal  or  tax  year;  that  is  to  say,  no  deduction  shall  be  made 
of  an  amount  in  excess  of  that  actually  chargeable  against  the 
operations  of  the  year  (fiscal  or  calendar)  for  which  the  return 
is  made.  Prepayments  may  be  deferred,  that  is,  such  part  of 
expenses  as  are  prepaid  may  be  deducted  from  expenses  and 
treated  as  "deferred  assets"  or  "prepayments"  in  the  balance 
sheet. 

The  accounts  most  commonly  accrued  or  deferred  are  in- 
terest, taxes,  insurance,  rents,  salaries,  commissions  and  in- 
come taxes  withheld,  but  the  principle  is  applicable  to  all  classes 
of  income  and  expenses. 

No  accruals  shall  be  deducted  from  income  unless  they  ap- 
pear upon  the  books  of  account  and  represent  expenses  ac- 
tually incurred  or  accrued  during  the  year. 

Wherever  the  expressions  "actually  paid"  or  "paid  during 
the  year"  appear  herein,  when  applied  to  individuals  or  cor- 
porations keeping  their  accounts  upon  the  "accrual  basis," 
such  accruals  are  comprehended  therein. 

Apart  from  facilitating  the  preparation  of  income  tax  re- 
turns, bookkeeping  suggestions  would  be  out  of  place  here. 
Distribu-  But  a  great  deal  of  tune  and  work  may  be  saved 
tionof  Ac-  to  the  bookkeeper  and  to  the  executive  who  is  re- 
counts, sponsible  for  the  contents  of  the  report,  by  em- 
ploying a  method  of  bookkeeping  that  will,  without  analysis 
of  accounts,  present  to  immediate  view  in  a  trial  balance,  the 
component  parts  called  for  by  the  income  tax  return.  This 
can  be  accomplished  only  by  a  suitable  distribution  of  accounts 
of  income  and  expenses,  assets  and  liabilities. 

Merchandise  sales  should  be  credited  to  a  separate  account 
in  the  ledger.  Where  departmental  accounts  are  kept,  the 
s  .  ledger  should  contain  a  separate  sales  account  for 

each  department  or  each  class  of  commodity.  The 
sales  called  for  by  the  supplementary  statement  of  the  income 
tax  return  under  "Gross  Income  from  Operations"  should  be 


BOOKKEEPING   SUGGESTIONS  199 

the  net  sales,  i.  e.,  gross  sales  (amounts  charged  to-  customers) 
less  returns,  allowances  and  discounts  allowed  on  sales. 

Goods  returned  by  customers  should  be  charged  to  a  separate 
account  unless  they  are,  in  aggregate,  so  small  a  proportion 
of  the  sales  that  a  separate  account  would  not  be  Return 
justified.     If  no  separate  account  is  kept,  the  re-  Sales, 
turns  should  be  charged  to  Sales  Account.    The  advantage  of 
a  separation — which  bears  no  relation  to  the  preparation  of  a 
tax  report — is  that  a  monthly  trial  balance  discloses,  at  a  glance, 
the  proportion  of  returns  to  the  volume  of  sales. 

As  stated  under  "Sales,"  goods  returned  by  customers  should, 
for  the  income  tax  report,  be  deducted  from  amount  shown 
by  Sales  Account  (Gross  Sales). 

Ordinary  allowances  on  goods  sold,  such  as  claims  by  reason 
of  breakage,  short  shipment,  overcharges,  defective  goods,  etc., 
should  be  charged  to  an  Allowance  Account  and  Allow- 
deducted  from  sales  for  the  income  tax  return,  ances. 
Exceptional  allowances,  such  as  unrecovered  shipments  lost 
in  transit,  for  which  the  shipper  is  responsible  and  cannot  re- 
cover from  the  transportation  company,  should  be  charged 
to  an  account  that  by  its  title  is  descriptive  of  its  contents,  as 
"Goods  Lost  in  Transit,"  and  should  be  so  stated  in  the  in- 
come tax  return.  All  losses,  to  be  deductible  from  the  income 
tax  return,  must  be  charged  off  in  the  year  the  loss  is  sustained. 

"Discounts  allowed"  on  sales  should  be  charged  to  an  ac- 
count bearing  that  title.    "Discounts  received"  on  Discounts 
goods  purchased  should  be  credited  to  a  separate  Allowed, 
account  so  entitled.    For  income  tax  purposes  discounts  allowed 
to  customers  are  a  reduction  of  the  gross  sales,  and  Discounts 
discounts  received,  as  a  trade  allowance  or  for  pre-  Received, 
payment  of  goods  purchased,  are  a  reduction  of  the  cost  of 
goods  bought. 

Rebates  on  sales  that  are  allowed  by  way  of  commissions,  or 
as  a  reward  for  selling  certain  quantities  of  commodities,  should 
be  carried  in  a  separate  account  in  the  ledger  and  R  . 
treated  in  the  income  tax  return  as  a  general  expense 
under  "Deductions"  and  included  in  "Commissions"  in  the 
supplementary  statement  under  "General  Expenses." 

Merchandise  purchased  should  be  charged  to  a  "Purchase 


200  INCOME   TAX — LAW  AND  ACCOUNTING 

Account"  in  the  ledger.  As  an  income  tax  deduction  in  the 
p  .  ascertainment  of  "Gross  Income  from  Operations," 

there  should  be  added  to  the  purchases  all  transpor- 
tation charges  paid  or  incurred  thereon.  There  should  be  de- 
ducted: returns,  claims,  discounts  received  and  "anticipations" 
received. 

A  manufacturing  corporation  employing  a  cost  system  that 
is  an  integral  part  of  the  bookkeeping  system,  i.  e.,  where  such 
system  is  comprehended  in  the  general  books  of  account  and 
included  in  the  general  ledger  trial  balance,  may  state  as  "Pur- 
chases" the  cost  of  manufactured  goods,  as  derived  from  such 
cost  system.  Mere  cost  memoranda,  data,  or  books  of  account, 
however,  that  are  not  subject  to  proof  of  correctness,  are  not 
sufficiently  reliable  records  from  which  to  prepare  income  tax 
returns.  It  is  not  necessary  that  the  cost  accounts  should  be 
kept  in  the  same  binder  or  within  the  same  cover  as  the  general 
ledger,  but,  in  summary,  the  costs  should  be  controlled  by 
general  ledger  accounts.  For  further  discussion  of  this  subject, 
see  "Manufacturing  Corporations  Operating  Cost-systems," 
page  216. 

Where  a  cost-system  does  not  answer  the  requirements  of 
proof  as  to  accuracy  of  results  the  form  of  return  (Form  1031, 
Revised)  should  be  adhered  to.  Corporations  doing  a  mercantile 
business  (buying  and  selling  raw  materials  or  finished  products, 
manufactured  by  others)  as  well  as  a  manufacturing  business, 
should  conform  to  the  classification  contained  in  the  return, 
unless  the  separate  departments  are  clearly  differentiated  in  the 
books  of  account. 

Transportation  charges  on  goods  sold  (freight  out)  should 
Freight  on  be  kept  separate  from  those  on  goods  purchased 
Sales.  (freight  in).  Freight  on  goods  sold,  for  income  tax 

purposes,  is  an  expense  of  doing  business  and  should  be  included 
Freight  on  in  "General  Expenses."  Transportation  charges 
Purchases.  on  goods  bought  increases  their  cost  and  should  be 
added  to  the  cost  of  purchases.  Separate  accounts  in  the  ledger 
should  be  kept  of  freight  on  sales  and  freight  on  purchases,  to  be 
known,  respectively,  as  "  Freight  Out "  and  "  Freight  In."  Items 
of  expressage  and  cartage  may  respectively  be  charged  or 
credited  to  these  accounts.  In  case  where  own  trucks  are  used 


BOOKKEEPING  SUGGESTIONS  2OI 

the  apportionment  may  be  estimated  based  upon  the  cost  of 
stable  or  auto  expenses,  etc. 

Stock  on  hand  should  be  carried  in  a  separate  account  in  the 
ledger  under  the  title  of  "Inventory  Account."    Where  freight 
and  other  transportation  charges  have  been  added  Inven- 
to   the   purchases,   the   proportion   added   thereto  tories. 
should,  technically,  be  included  in  the  inventory.     But  this 
would  have  to  be  approximated  at  best,  and  may,  as  an  ex- 
pediency, be  disregarded  except  where  it  is  a  material  item  or 
where  the  computation  is  rendered  simple. 

For  income  tax  purposes,  inventories  should  be  computed  at 
cost  and  so  stated  in  the  supplementary  statement  of  the  return.1 
The  deduction  of  depreciation  from  the  cost  of  commodities 
dealt  in  is  prohibited.  (See  " Stock  on  Hand,"  page  188.)  "No 
part  of  the  overhead  expenses  should  be  added  to  the  inventory." 

Care  should  be  exercised  to  see  that  the  amount  of  stock  on 
hand  reported  at  the  beginning  of  a  tax  year  is  the  same  amount 
as  that  shown  as  on  hand  at  the  close  of  the  preceding  year.  An 
increase  in  the  amount  at  the  beginning  of  a  year  over  that 
stated  at  the  close  of  the  previous  year  would  result  in  a  decrease 
in  the  gross  income,  which,  in  the  absence  of  a  clerical  or  tech- 
nical error,  might  be  prima  facie  evidence  of  fraud. 

Rents  received  should  be  kept  in  a  separate  account  from  rents 
paid.  Receipts  of  rent,  where  the  corporation  owns  the  rented 
property,  must  be  reported  as  income,  whereas  Rentals 
rents  paid  are  deductible  as  general  expenses.  The 
amount  paid  on  a  leasehold  may  be  prorated  over  the  period  of 
the  lease  and  deducted  annually  as  rent  paid  during  the  year. 
This  is  also  true  where  a  building,  reverting  to  the  landlord,  is 
erected  on  leased  land;  the  annual  rate  of  deduction  being  the 
fraction:  one,  as  the  numerator,  and  the  number  of  years  of  the 
leasehold,  as  the  denominator,  multiplied  by  the  cost  of  the  build- 
ing and  improvements.  The  cost  of  such  improvements  should  be 
charged  to  a  "Leasehold  Account"  in  the  ledger  and  the  amount 
charged  off  annually  should  be  stated  in  the  income  tax  return 
under  "Expenses,  General"  in  the  supplementary  statement. 

Ordinary  rentals  paid  should  also  be  stated  in  the  supple- 

1  By  more  recent  ruling  inventories  may  now  be  computed  at  cost  or  at 
cost  or  market  price,  whichever  is  the  lower.  See  page  167. 


202  INCOME   TAX — LAW  AND  ACCOUNTING 

mentary  statement  under  "Expenses,  General"  the  total  of 
which  appears  in  the  report  under  "Deductions." 

Royalties  received  are  returnable  as  income  from  rentals. 
Where  royalties  are  both  paid  and  received,  it  is  advisable  to 

Ro  allies  ^eeP  a  seParate  account  for  each  in  the  ledger, 
designating  them  "Royalties  Received"  and  "Roy- 
alties Paid,"  because  they  are  separately  reported  in  the  return 
of  net  income.  Royalties  paid  are  returnable  in  "Payments  in 
Lieu  of  Rent."  Royalties  received  should  be  included  in  item 
"From  Rentals"  under  "Gross  Income." 

Interest  received  and  interest  paid  should  be  respectively 
Interest  credited  and  charged  to  separate  ledger  accounts, 
Received.  ancj  eacn  of  them  should  be  further  subdivided  ac- 
cording to  the  separation  called  for  by  the  tax  return,  as  follows: 

Interest  received  on  bonds  or  other  obligations  of  the  United 
States,  or  its  possessions,  from  a  State,  Municipality  or  other 
political  subdivision,  although  not  subject  to  the  income  tax, 
must  be  reported  as  income  in  the  supplementary  statement  and 
should  be  credited  to  an  account  in  the  ledger  entitled  "Interest 
Received  on  Government  Securities." 

All  interest,  other  than  that  received  on  Government  bonds 
or  obligations,  except  "anticipations,"  should  be  credited  to  a 
general  "Interest  Received  Account,"  and  should  be  reported 
under  "Gross  Income"  in  the  return. 

"Anticipations" — interest  received  for  the  prepayment  of 
accounts  payable — should  be  credited  to  "Anticipation  Ac- 
count" and  for  income  tax  purposes  are  deductible  from  the 
cost  of  purchases,  the  same  as  are  discounts  received. 
Interest  Interest  paid  by  a  corporation  should  be  classified 

Paid.  as  follows: 

1.  "Interest  paid  on  indebtedness,  wholly  secured  by  col- 
lateral, the  subject  of  sale  in  the  ordinary  business  of  the  cor- 
poration," should  be  charged  to  an  account  entitled  "Interest 
Paid  on  Secured  Debts"  and  reported  in  the  return  under 
"Expenses,  General,"  in  the  supplementary  statement  thereof. 

2.  Interest  paid  on  mortgages  secured  by  property  which 
the  corporation  occupies  but  does  not  own  and  has  no  equity 
in,  should  be  charged  to  "Interest  Paid  in  Lieu  of  Rent"  and 
stated  in  the  return  under  "Deductions." 


BOOKKEEPING   SUGGESTIONS  203 

3.  All  interest  paid  on  bonds  and  other  indebtedness  should 
be  charged  to  "Interest  Paid  Account"  and  stated  in  the 
return  under  "Deductions."  The  amount  of  interest  deduct- 
ible under  this  item  is  the  amount  actually  paid  within  the 
year  on  an  amount  of  bonded  or  other  indebtedness  not  in 
excess  of  the  sum  of  one  of  the  subdivisions  of  "A"  plus  "B": 

A.  i.  The  paid-up  capital  stock  outstanding  at  the  close  of 

the  year, 

or 

2.  If  the  capital  stock  has  no  par  or  nominal  value,  the 

amount  of  cash  or  its  equivalent  paid  or  transferred 
to  the  corporation  as  a  consideration  for  shares  issued 
and  outstanding  at  the  close  of  the  year, 
or 

3.  If  no  capital  stock,  the  entire  amount  of  capital  (not 

including  liabilities)   employed  in  the  business  at 
the  close  of  the  year, 
plus 

B.  One-half  of  the  interest-bearing  indebtedness  outstand- 

ing at  the  close  of  the  year. 

For  example,  in  the  case  of  a  corporation  having,  at  the 
close  of  the  year,  a  capital  stock  of  $500,000  and  bonded  and 
other  indebtedness  of  $200,000,  the  deductible  interest,  at  6  per 
cent,  per  annum,  would  not  exceed: 

6  per  cent,  on  $500,000 $30,000 

6  per  cent,  on    100,000 6,000 


Total,  6  per  cent,  of  $600,000 $36,000 

Should  the  actual  interest  paid  during  the  year  exceed  the  sum 
of  $36,000,  in  the  example  cited,  the  excess  would  not  be  de- 
ductible and  only  $36,000  should  be  entered  in  the  report 
under  "Deductions." 

In  the  case  of  subdivision  A,  3,  having  no  capital  stock,  the 
"capital  employed  in  the  business  .  .  .  contemplates  the 
entire  capital  paid  in  by  the  members  of  the  company,  includ- 
ing so  much  of  the  accumulated  surplus  as  is  not  in  excess  of 
the  needs  of  the  business,  but  does  not  include  any  borrowed 
capital  or  interest-bearing  indebtedness." 


204  INCOME   TAX — LAW  AND  ACCOUNTING 

In  the  supplementary  statement  under  "Interest  Deductible" 
should  be  listed  "all  forms  of  indebtedness  upon  which  interest 
was  paid,"  stating  as  to  each: 

1.  Name  or  kind  of  obligation  (Bonds  Payable,  Mortgages 

Payable,  Bills  Payable,  etc.), 

2.  Amount  of  principal  of  each  class, 

3.  Rate  of  interest  on  each  class, 

4.  Amount  of  interest  paid  on  each  class  of  obligations. 
Irrespective  of  the  amount  deducted  in  the  main  report  under 
"Deductions,"  the  amount  stated  as  "interest  paid"  in  the 
supplementary  statement  is  the  total  amount  paid  during  the 
year.    The  amount  deducted  cannot  exceed  the  total  amount 
actually  paid,  but,  by  the  limitation  of  law  hereinbefore  stated, 
may  be  less. 

Interest  paid  on  indebtedness  incurred  for  the  purchase  of 
obligations  or  securities,  the  interest  upon  which  is  exempt 
from  taxation  is  not  deductible.1 

The  interest  paid  on  indebtedness  wholly  secured  by  property 
collateral,  tangible  or  intangible,  the  subject  of  sale  or  hypothe- 
cation in  the  ordinary  business  of  a  corporation,  as  where  a 
dealer  in  the  property  constituting  such  collateral  or  in  the 
case  of  a  broker  loaning  the  funds  thereby  procured,  may  be 
deducted  as  a  part  of  the  expense  of  doing  business,  but  such  in- 
terest shall  only  be  deductible  on  an  amount  of  such  indebted- 
ness not  in  excess  of  the  actual  value  of  such  property  collateral. 

No  dividends  or  so-called  interest  on  any  kind  of  capital 
stock  are  deductible;  "guaranteed,"  cumulative  or  preferred 
dividends  are  no  exceptions. 

Interest  on  any  bonds  of  a  corporation  secured  by  mort- 
Interest.  gage  on  its  real  or  personal  property  is  deductible 
in  a  return  of  net  income  of  the  corporation. 

Where,  however,  a  corporation  issues  so-called  "debenture 
bonds"  secured  by  mortgages  on  real  estate  made  by  borrowers 
"  Deben-  from  the  corporation  in  favor  of  such  corporation, 
ture  the  interest  on  such  bonds  is  not  deductible  from 

Bonds."  the  taxable  income.  In  the  case  of  Middlesex 
Banking  Company  v.  Robert  O.  Eaton,  Collector  (221  Fed. 
86),  affirmed  by  the  United  States  Circuit  Court  of  Appeals, 

1  An  exception  to  this  rule  is  the  Second  Liberty  Loan  Bonds,  see  p.  103, 


BOOKKEEPING  SUGGESTIONS  205 

it  was  found  upon  the  trial  that  the  plaintiff,  under  its 
charter  had  the  powers  of  a  safe-deposit  company,  of  a 
bank  of  deposit,  and  of  a  company  to  sell  securities,  but 
that  its  principal  business  was  the  sale  of  securities.  Judge 
Ward  of  the  United  States  Circuit  Court  of  Appeals  found 
that  "practically  the  whole  of  the  business  done  by  the  plain- 
tiff during  the  years  in  question  was  the  sale  of  its  own  obliga- 
tions, called  'debenture  bonds,'  secured  by  mortgages  on  prop- 
erty in  the  South  and  West,  deposited  with  the  Columbia 
Trust  Co.  as  trustee  for  the  bondholders,  and  of  the  obligations 
of  borrowers  to  the  plaintiff,  secured  by  mortgages,  which,  ac- 
companied by  its  own  interest  coupons  for  a  less  rate  of  in- 
terest than  it  receives  from  the  borrowers,  it  guarantees  as  to 
both  principal  and  interest  and  sells  to  purchasers.  These 
latter  are  called  'guaranteed  real  estate  securities.'  Both 
these  forms  of  securities  the  plaintiff  sells  throughout  the  East 
by  means  of  agents,  and  its  profit  in  each  case  is  represented 
by  the  difference  between  the  rate  of  interest  it  receives  from 
its  southern  and  western  borrowers  and  the  interest  which  it 
pays  to  the  eastern  purchasers  of  the  obligations." 

The  plaintiff's  theory  was  that  the  interest  in  question  was 
paid  upon  money  deposited  with  it  and  as  such  was  deductible; 
this  the  Court  disposed  of  in  the  following  language:  "Without 
stopping  to  analyze  the  charter  powers  of  the  plaintiff  and  to 
determine  whether  it  is  or  is  not  a  bank  or  banking  association 
and,  whether,  if  so,  it  has  not  also  other  and  different  powers, 
we  think  it  perfectly  clear  that  the  interest  in  question  is  not 
interest  upon  money  deposited  with  it,  but  is  interest  paid  on 
its  own  obligations  or  on  the  obligations  of  others  guaranteed 
by  it  which  it  has  sold  to  the  investing  public.  The  purchase 
price  is  no  more  money  deposited  with  the  plaintiff  at  interest 
than  is  money  paid  to  a  railroad  company  for  the  purchase  of 
its  bonds.  The  transaction  is  not  a  banking  transaction  at  all 
like  the  giving  of  a  pass  book  or  a  certificate  of  deposit  to  a 
depositor,  but  a  business  of  selling  securities  to  investors. 
Selden  v.  Equitable  Trust  Co.  (94  U.  S.  419)-" 

F.  A.  Cleveland,  in  his  work  on  Funds  and  Their  Uses  says 
that:  "The  term  debenture  bond  is  the  most  loosely  used  of 
any  of  the  terms  descriptive  or  suggestive  of  financial  instru- 


206  INCOME   TAX — LAW  AND  ACCOUNTING 

ments."  The  test  of  deductibility  of  interest  on  such  bonds  is 
whether  it  is  actually  an  "expense  of  the  business,"  and  to  be 
such  it  must  be  paid  upon  an  actual  obligation  of  the  company, 
not  merely  upon  an  "evidence  of  indebtedness."  Interest  paid 
as  a  distribution  of  profits  is  not  deductible  in  an  income  tax 
return. 

Dividends  received  by  a  corporation  should  be  credited  to 
Dividends  "Dividends  Received"  account  and  the  amount 
Received,  thereof  should  be  reported  in  "  Gross  Income." 

Inasmuch  as  dividends  received  by  corporations  upon  the 
stock  of  other  corporations,  also  subject  to  income  taxes  are, 
under  the  amended  law,  liable  only  for  the  normal  tax  of  2  per 
cent,  under  the  Act  of  September  8, 1916,  and  free  of  taxes  under 
the  War  Income  Tax  and  the  Excess  Profits  Tax,  provision  will 
be  made  in  the  revised  return  of  corporations  for  a  separate 
deduction  of  dividends. 

Stock  dividends  constitute  taxable  income  to  the  amount  of 
the  earnings  or  profits  so  distributed. 

It  is  not  necessary  that  the  dividends  be  actually  paid  either 
by  cash  or  stock,  because  "dividends  shall  be  held  to  mean 
any  distribution  made  or  ordered  to  be  made  by  a  corpo- 
ration out  of  its  earnings."  Therefore,  a  mere  credit  on  the 
books  of  the  issuing  corporation  is  sufficient  to  obligate  the 
recipient  to  include  the  amount  of  such  credit  applicable  to 
him  or  it  (a  corporation)  as  income  in  his  or  its  return  of  net 
income. 

All  income,  other  than  that  derived  from  trading,  rentals, 
interest,  dividends  received,  and  income  from  the  sale  of  capital 
Income.  assets,  should  be  credited  in  the  ledger  to  an  account 
Sundry  "Income  from  Sundry  Sources"  and  should  be 
Sources.  included  in  "Gross  Income."  Profits  from  the  sale 
of  capital  assets  should  be  included  in  this  item  of  the  return. 
For  treatment  of  the  account  in  the  ledger,  and  method  of  com- 
puting profit  from  the  sale  of  capital  assets,  see  page  33. 

In  the  supplementary  statement,  all  income  from  sources 
other  than  those  specifically  called  for  in  the  return,  which  is 
subject  to  tax,  should  be  itemized. 

These  items  are  called  for  in  toto  in  the  supplementary  state- 
ment of  the  report,  under  "Expenses,  General."  "Labor"  and 


BOOKKEEPING  SUGGESTIONS  207 

"wages"  for  the  purpose  of  the  income  tax  return,  apply  to 
all  wages,  direct  and  indirect  (except  where  a  cost-  Labor, 
system  is  operated,  see  page  216).   All  salaries,  other  cjj^s?* 
than  those  of  officers  of  the  corporation  which  are  sions. 
stated  separately  should  be  included  in  "Labor,  Wages  and 
Commissions."  Bonus  and  profit  sharing  payments  to  employees 
other  than  officers,  which  are  not  gratuities,  but  additional  pay 
for  services  actually  rendered,  should  be  included  in  this  deduc- 
tion.  A  separate  ledger  account  should  be  kept  to  which  items  of 
this  class  will  be  charged. 

Separate  ledger  accounts  should  be  kept  for  wages  and  com- 
missions, respectively,  and  each  of  them  should  be  further 
subdivided  into  separate  accounts  according  to  requirements  of 
the  business.  For  example,  wages  paid  in  connection  with 
production  (Productive  Wages),  office  salaries,  salaries  of  sales- 
men, etc.,  should  be  carried  in  separate  accounts  to  facilitate  the 
preparation  of  intelligible  Profit  and  Loss  Accounts  and  for 
purposes  of  comparison  of  various  departmental  expenses  of 
different  periods. 

Commissions,  also,  should  be  kept  in  accounts,  that,  by  their 
title,  designate  whether  they  are  applicable  to  cost  of  production, 
administration  or  selling  expenses. 

Income  from  commissions  should  be  credited  to  a  "  Commis- 
sions Received"  account  and  included  in  item  "Gross  Income" 
of  the  tax  return.  Where  commissions  are  both  received  and 
paid  they  should  be  credited  and  charged,  respectively,  to 
separate  ledger  accounts  that  by  their  title  are  descriptive  of 
their  contents. 

These  items,  called  for  in  the  supplementary  statement, 
under  "Expenses,  General,"  should  contain  in  toto  only  the 
cost  of  supplies  and  service  purchased,  such  as  Fuel,  Light, 
coal,  gas,  electricity,  power,  etc.,  and  should  not  Power,  etc. 
include  labor  of  engineers,  firemen,  etc.,  which  latter  are  called 
for  in  "Wages." 

For  the  purpose  of  the  income  tax  return,  it  is  necessary 
only  to  keep  one  general  "Repair  Account"  of  materials.    Foi 
accounting  purposes,   however,   repairs   should  be  Repairs, 
subdivided  according  to  requirements,  as  Repairs  ^^^ 
to  Machinery  and  Plant,  Repairs  to  Buildings,  etc.  cidental. 


208  INCOME   TAX — LAW  AND  ACCOUNTING 

To  more  easily  prepare  the  tax  report  these  accounts  again 
should  be  divided  into  Repairs — Materials  and  Supplies,  and 
Repairs — Wages,  because  they  are  called  for  separately.  The 
separation  of  wages  and  materials  only  applies  where  the  repairs 
are  made  by  own  employees  of  the  corporation.  Where  the 
repairs  are  made  by  "outsiders"  the  total  cost  of  repairs  should 
be  included  in  "Repairs." 

Care  should  be  exercised  to  differentiate  repairs  and  renewals 
from  improvements  and  betterments;  the  latter  are  not  deduc- 
tible as  expenses.  A  mere  replacement  that  is  not  an  improve- 
ment and  does  not  enhance  the  material  value  of  property  is 
chargeable  as  a  repair;  the  same  is  true  of  that  which  merely 
maintains  efficiency. 

A  separate  ledger  account,  to  which  should  be  charged  all 
salaries  of  officers,  should  be  kept.  The  amount  of  such  salaries 
Salaries  of  will  be  stated  in  the  supplementary  statement  of 
Officers.  the  return  under  "Expenses,  General."  A  salary 
is,  in  the  ordinary  acceptation  of  the  word,  a  compensation 
that  is  fixed  by  agreement  in  advance.  Salaries,  to  be  deductible, 
shall  not  be  based  upon  stockholdings;  they  must  be  a  business 
expense  and  not  a  distribution  of  profits.  A  distribution  of 
profits  is  not  deductible  as  an  expense. 

Where,  however,  "special  payments,  often  designated  as 
bonuses,  are  made  to  officers  or  employees  of  corporations,  pur- 
suant to  a  contract,  express  or  implied,  as  additional  compensa- 
tion for  services  rendered,  which  payments,  when  added  to 
the  stipulated  salaries,  do  not  exceed  a  reasonable  compensa- 
tion for  the  services  rendered,  such  payments  may  be  regarded 
as  a  part  of  the  wages  or  hire  of  the  officer  or  employee,  and, 
as  such,  may  allowably  be  deducted  from  gross  income  as  a 
business  expense."  In  such  case  the  bonus  or  additional  com- 
pensation of  an  officer  should  be  included  in  item  "Salaries  of 
Officers."  But  "this  ruling  contemplates  that  such  payments 
are  conditioned  upon  the  services  rendered  by  the  employee 
and  not  upon  the  earnings  of  the  corporation.  If  it  should  ap- 
pear that  the  additional  or  special  payments  are  dependent 
upon  the  earnings  of  the  company,  rather  than  upon  the  services 
rendered,  or  if  such  payments  are  made  only  occasionally,  and 
then,  at  the  option  of  the  corporation,  as  a  sort  of  thank-offering 


BOOKKEEPING  SUGGESTIONS  2OQ 

because  of  a  prosperous  year,  and  not  in  pursuance  of  a  fixed 
policy  or  practice,  or  any  contract,  express  or  implied,  it  will 
be  held  that  such  payments  are  gratuities  and,  as  such,  are 
not  properly  deductible  from  gross  income." 

Voluntary  contributions  or  donations,  such  as  "Christmas 
gifts"  are  not  deductible.  But  a  payment  by  an  employer  to 
his  employee,  irrespective  of  when  made,  during  the  holiday 
or  any  other  season  of  the  year,  in  consideration  of  services 
rendered,  as  extra  compensation,  is  deductible  by  the  payer. 

In  addition  to  the  accounts,  the  balances  of  which  are  sep- 
arately called  for  by  the  return,  every  mercantile  Sundry 
concern  has  more  or  less  additional  expenses  for  Expense 
which    separate    accounts,    according    to    require-  Accounts, 
ments,  should  be  kept,  such  as: 
Freight  on  Sales  Insurance 

Packing  Supplies  Postage 

Shipping  Supplies  Stationery  &  Printing 

Stable  Expense  Telegraph  &  Telephone 

Auto  Expense  Legal  Expense 

Advertising  Auditing  Expense 

Traveling  Expense  General  Office  Expense 

In  the  case  of  a  manufacturing  company,  that  does  not 
operate  a  cost-system  as  an  integral  part  of  the  bookkeeping 
system  (see  page  216)  an  intelligible  classification  would  require 
such  additional  accounts  as  General  Factory  Expense,  Pro- 
duction Supplies,  etc. 

All  expenses  that  are  not  separately  provided  for  in  the 
return,  such  as  those  just  mentioned,  should  be  stated  in  item 
"Other  Expenditures"  in  the  supplementary  statement.  It 
is  not  necessary  to  state  each  account  separately;  they  may 
be  combined  so  as  to  include  them  all  in  five  groups.  Each 
group  should  contain  items  related  to  each  other  or  coming 
under  the  same  general  head  of  production,  administration  or 
selling  expenses.  For  example,  they  may  be  grouped  as  follows: 

Packing  and  Shipping  Supplies, 

Stable  and  Auto  Expense, 

Advertising  and  Traveling  Expense, 

Postage,  Stationery,  Telegraph  &  Telephone, 

Legal  and  Auditing  Expense. 


2IO  INCOME   TAX — LAW  AND  ACCOUNTING 

Items  that  cannot  be  classified  under  a  general  head  may 
be  stated  as  "Miscellaneous  Unclassified  Expenses,"  but  the 
amount  so  stated  should  be  comparatively  small. 

Import  duties  and  import  taxes  should  be  charged  to  "Du- 
Customs  ties  Account"  in  the  ledger  and  included  in  the 
Duties.  return  as  expense  under  "  General  Expense."  These 
items  should  not  be  stated  as  taxes. 

Fire  losses  usually  involve  both  capital  and  current  assets. 
It  is  customary  immediately  after  a  fire  casualty  to  proceed 
Loss  by  to  arrive  at  an  inventory  based  on  cost  of  the  de- 
Fire-  stroyed,  partly  destroyed  and  damaged  merchandise 

for  insurance  purposes.  When  this  has  been  done  the  value 
of  the  destroyed  and  damaged  merchandise,  based  on  such 
inventory,  should  be  charged  to  an  account  in  the  ledger  bear- 
ing title  of  "Fire  Loss  Account."  To  this  account  should  also 
be  charged  all  expenses  incurred  in  the  adjustment  of  loss, 
including  compensation  of  adjusters,  if  any,  as  well  as  the 
cost  of  repairs  and  replacement  of  buildings  occasioned  by  the 
fire.  The  amount  recovered  from  insurance  companies  should 
be  credited  to  said  account.  The  debit  excess  of  the  Fire  Loss 
Account  will  then  represent  the  loss  sustained  by  fire  which 
should  be  included  in  the  income  tax  return  in  item  "Losses 
Sustained,"  and  under  the  same  designation  in  the  supplemen- 
tary statement.  At  the  end  of  the  fiscal  period  the  balance  of 
Fire  Loss  Account  should  be  charged  to  Profit  and  Loss  Account. 

The  profit  or  loss  on  the  sales  of  capital  assets  is  determined 
in  the  case  of  assets  acquired  subsequent  to  March  i,  1913, 
Sales  of  ky  the  difference  between  the  cost  and  selling  price. 
Capital  If  the  assets  sold  were  acquired  prior  to  March  i, 
Assets.  1913,  then  the  profit  or  loss  is  the  difference  be- 
tween the  fair  market  value  on  March  i,  1913,  and  the  selling 
price. 

The  profit  or  loss  on  the  sale  of  capital  assets  should  be 
credited  or  charged,  respectively,  to  "Income  on  Sales  of  Capital 
Assets  Account"  and  "Loss  on  Sales  of  Capital  Assets."  The 
debit  of  such  accounts  will  be  a  transfer  of  the  cost  or  fair 
market  value,  as  the  case  may  be,  from  the  asset  account  in 
which  the  subject  of  sale  had  previously  been  carried  in  the 
ledger. 


BOOKKEEPING  SUGGESTIONS  211 

According  to  the  supplementary  statement  of  the  income 
tax  return,  it  would  appear  that  the  profit  on  sales  of  capital 
assets  should  be  included  in  "Gross  Income  From  Operations." 
This  is  obviously  wrong  in  principle,  and  it  is  suggested  that 
such  income  be  stated  in  item  "From  other  sources."  Losses 
on  sales  of  capital  assets  should  be  included  in  "Losses  Sus- 
tained." 

This  subject  has  been  treated  at  some  length  in  Chapter  VI, 
pages  175  to  195.     Suffice  it  to  say  here,  that  any  amount  de- 
ducted in  the  return  of  net  income  for  depreciation  peprecia- 
(in  both  the  report  and  supplementary  statement)  ^on- 
must  be  actually  charged  off  in  the  ledger,  either  on  the  asset 
account  itself  or  in  a  negative  account,  such  as,  a  Reserve  for 
Depreciation. 

Depreciation  is  usually  charged  off  by  a  journal  entry,  debit- 
ing Depreciation  Account  and  crediting  Reserve  for  Deprecia- 
tion. The  Depreciation  Account  is  closed  into  the  Profit  and 
Loss  Account  and  the  Reserve  Account  remains  open  until 
the  asset  that  it  offsets  (writes  down),  is  either  sold  or  other- 
wise disposed  of;  then  the  difference  between  the  cost  and  the 
amount  written  off  in  past  years,  plus  proceeds  of  sale,  is  charged 
off  as  a  capital  loss  or  profit,  as  the  case  may  be. 

As  in  the  case  of  depreciation  of  property,  depletion  of  mines 
and  oil  or  gas  wells,  by  reason  of  exhaustion  of  the  natural 
product,  must  be  actually  charged  off  in  the  ledger  D    j  ^ 
of  the  corporation  seeking  the  deduction.    Mere 
memorandum  entries  thereof  are  insufficient.     The  purpose 
of  an  allowance  for  depletion  is  to  return  to  the  corporation 
the  capital  invested,  or,  in  case  of  purchase  prior  to  March  i, 
1913,  an  amount  sufficient  to  return  to  the  corporation  the 
fair  market  value  of  such  deposits  as  at  that  date. 

It  has  been  indicated  by  the  Commissioner  of  Internal  Reve- 
nue that  in  order  to  render  a  claim  for  depletion  of  property 
deductible  from  income  for  tax  purposes,  it  is  in-  Ledger 
sufficient  to  make  a  mere  journal  entry  thereof;  ^ 
it  must  be  actually  charged  off  in  the  general  ledger,  ( 
either  against  the  asset  account  of  the  property  erty. 
depleted,  or  to  the  credit  of  "Reserve  for  Depletion";  further, 
that  such  reserve  shall  be  deducted  from  the  asset  account  in 


212  INCOME   TAX — LAW  AND  ACCOUNTING 

the  balance  sheet,  as  well  as  in  the  report  to  the  stockholders. 
The  amount  deducted  for  depletion  in  an  income  tax  return 
must,  in  fact,  be  charged  off  in  such  way  that  it  reduces  the 
asset  account  in  the  general  ledger  by  the  amount  deducted  in 
the  return  of  annual  net  income. 

Taxes  should  be  charged  to  an  account  in  the  ledger  bear- 
_  ing  that  title.  All  taxes  are  deductible  except 

1  &XCS.  , 

that: 

1.  Income  and  excess  profits  taxes  are  not  deductible.    (Ex- 

cess profits  tax  assessment  is  deductible  as  a  credit  in 
ascertaining  amount  subject  to  income  and  war  income 
taxes.) 

2.  Foreign  taxes  accruing  to  a  foreign  corporation  are  not 

deductible  from  income  derived  upon  capital  invested 
in  this  country. 

3.  Taxes  paid  for  local  benefits  are  not  deductible. 

4.  Taxes  paid  by  corporations  to  render  their  stock  or  bonds 

tax-free  are  not  deductible,  because  such  taxes  are 
primarily  obligations  of  their  stockholders  and  bond- 
holders. 

Foreign  taxes  paid  by  a  corporation  organized  under  the 
laws  of  any  State  of  the  United  States  are  deductible,  because 
such  corporation  pays  an  income  tax  on  its  entire  net  income 
irrespective  of  where  such  income  is  derived  or  where  its  capital 
is  invested. 

The  income  tax  return  calls  for  the  amount  of  capital  stock 
paid  in  and  outstanding.  This  does  not  include  either  stock 
Capital  unissued  or  "treasury  stock."  If  the  corporation 
Stock.  nas  no  capital  stock,  then  it  should  state  the  amount 
of  capital  employed  in  the  business,  which,  ordinarily,  is  the 
excess  of  the  assets  over  liabilities,  i.  e.,  invested  capital  plus 
surplus. 

The  supplementary  statement  calls  for  the  division  of  capital 
stock  into  common  and  preferred.  If  the  company  has  no 
capital  stock  then  the  "capital  employed  in  the  business" 
should  be  stated.  (See  Interpretation,  page  203.) 

Uncollectible  accounts  receivable  should  be  charged  to  a 
separate  account  that  by  its  title  designates  what  it  contains, 


BOOKKEEPING  SUGGESTIONS  213 

such  as  Bad  Debts,  Uncollectible  Accounts  or  Bad  Accounts. 
Bad  debts  should  not  be  charged  to  Profit  and  Loss 
"  Account  until  at  the  end  of  the  fiscal  period,  when 
the  books  are  closed. 

Rulings  direct  that  accounts  shall  be  deducted  only  when 
they  have  been  actually  ascertained  to  be  worthless.  Reserves 
to  provide  for  anticipated  bad  debts  are  not  deductible.  The 
accounts  deducted  must  be  charged  off  in  the  books  of  account 
during  the  year  for  which  the  return  is  made,  wherein  the  ac- 
counts are  deducted. 

Payments  received  on  accounts  after  they  have  been  charged 
off  should  be  credited  to  Income  from  Bad  Debts  Account  and 
stated  in  the  return  as  income  "'From  other  Sources"  under 
"Gross  Income." 

The  most  prevalent  causes  that  justify  charging  off  accounts 
receivable,  are: 

1.  Bankruptcy  of  debtor. 

2.  Assignment  by  debtor  for  benefit  of  creditors. 

3.  Execution  against  property  returned  unsatisfied. 

4.  Disappearance  of  debtor  leaving  no  assets. 

5.  Death  of  debtor  leaving  no  estate. 

The  test  of  charging  off  accounts  should  not  be  limited  to 
the  reasons  stated  above.  Each  case  should  be  determined  upon 
the  particular  conditions  governing  it.  The  language  of  rulings 
under  the  old  income  tax  law  would  indicate  that  legal  procedure 
must  be  exhausted  before  an  account  may  be  charged  off. 
That,  no  doubt,  is  true  in  many  cases,  but  all  accounts  do  not 
justify  the  expenditure  of  money  to  effect  collection. 

Bankruptcy,  as  a  general  rule,  is  sufficient  in  itself  to  warrant 
charging  off  an  account.  The  average  per  cent,  of  dividends 
paid  by  the  estates  of  bankrupts  to  creditors  is  so  small  that 
unless  it  is  apparent  that  an  estate  has  realizable  assets,  in  a 
reasonable  proportion  to  the  liabilities,  the  entire  account  may 
be  charged  off  at  once.  Where  dividends  are  received  thereon, 
such  dividends  should  be  stated  as  income. 

The  question  as  to  when  an  account  is  "actually  ascertained 
to  be  worthless"  is  one  that  can  best  be  answered  by  the  cred- 
itor, and  he  might  better  err  on  the  side  of  safety  than  to  permit 
the  accumulation  of  uncollectible  accounts. 


214  INCOME   TAX  LAW  AND  ACCOUNTING 

The  Department,  in  a  recent  ruling,  holds  that  a  debt  due 
from  a  corporation  possessed  of  assets,  cannot  be  deducted 
until  the  affairs  of  the  corporation  have  been  closed  and  its 
receiver  discharged.  Under  this  decision,  the  question  arises 
"when  is  a  bankrupt's  asset  an  asset?"  Those  familiar  with 
bankruptcy  practice  know  that,  by  a  very  large  margin,  the 
supposed  assets  of  a  bankrupt  ordinarily  "fade  away"  even 
in  a  superficial  examination  of  them,  and  regardless  of  repre- 
sentations by  the  bankrupt,  forced  sales  of  what  remains,  does 
not,  generally  speaking,  realize  more  than  the  cost  of  adminis- 
tration of  the  bankrupt's  estate. 

"  Receipt  is  acknowledged  of  your  letter  of  October  3, 
1917,  wherein  you  request  to  be  informed:  'Whether  there 
is  any  rule  or  regulation  prescribing  the  manner  of  ascer- 
taining whether  a  debt  is  worthless,  in  order  to  entitle 
owner  of  the  worthless  debt  to  deduct  its  amount  in  making 
his  income  tax  return?  We  are  particularly  anxious  to 
know  whether  there  must  be  an  unsatisfied  judgment  or  a 
judicial  determination  that  the  debt  is  worthless.  If  the 
creditor  knows,  of  his  own  knowledge,  that  the  debtor  is 
insolvent  and  accepts  a  part  of  the  debt  and  releases  the 
debtor  from  the  balance  of  the  debt,  is  the  creditor  entitled 
to  deduct  the  amount  released  in  his  income  tax  return?' 

"In  reply  you  are  advised  that  this  office  does  not  require, 
in  the  case  of  an  individual  debtor,  that  an  unsatisfied 
judgment  shall  exist  or  a  judicial  determination  be  reached 
in  order  that  a  creditor  may  secure  the  benefit  of  a  deduc- 
tion on  account  of  a  debt  which  he  considers  worthless  and 
uncollectible;  but,  taking  into  consideration  the  time  the 
debt  has  overrun  and  the  financial  condition  of  the  debtor, 
it  is  required  that  it  be  shown  beyond  a  reasonable  doubt 
that  the  debt  is  worthless  and  uncollectible. 

"The  office  holds  that  a  debt  due  from  a  corporation 
possessed  of  assets  cannot  be  claimed  as  a  deduction  except 
for  the  year  during  which  the  corporation's  affairs  are 
finally  closed  and  its  receiver  in  bankruptcy  discharged; 
and  where  a  creditor,  to  protect  himself  from  a  total  loss, 
enters  into  a  compromise  agreement  under  the  terms  of 
which  he  accepts  a  part  payment  of  a  debt  and  releases  the 
debtor  from  payment  of  the  balance,  the  unpaid  portion 
may  be  claimed  as  a  deduction."  (Letter  to  Wollman  and 


BOOKKEEPING  SUGGESTIONS  215 

Wollman,  New  York,  N.   Y.,   signed  by  Commissioner 
Daniel  C.  Roper,  and  dated  October  16,  1917.) 

The  main  report  calls  for  the  amount  of  bonded  and  other 
interest-bearing   indebtedness   outstanding   at    the  Interest- 
close  of  the  year,  exclusive  of  indebtedness  wholly 
secured  by  collateral,  the  subject  of  sale  or  hypoth-  ness, 
ecation  in  the  ordinary  business  of  the  corporation. 

The  supplementary  statement  calls  for  details  by  classifica- 
tion, rate  of  interest  and  amount  of  principal  of  all  interest- 
bearing  indebtedness.  This  includes  all  the  items  called  for 
in  the  body  of  the  report,  and  in  addition  thereto,  the  total 
amount  owing,  etc.,  on  debts,  wholly  secured  by  collateral,  the 
subject  of  sale  in  the  ordinary  business  of  the  corporation. 

It  will  be  noted  that  no  provision  has  been  made  for  a  mer- 
chandise account;  instead,  separate  accounts  have  been  recom- 
mended,   consisting   of    Sales,    Purchases,    Return  Merchan- 
Sales  and  Inventory.    Return  purchases,  ordinarily,  disc  Ac- 
may  be  credited  to  Purchase  Account.     A  Mer-  count- 
chandise  Account  has  no  place  in  a  modern  set  of  books. 

No  postings  should  be  made  to  the  Profit  and  Loss  Account 
during  the  interim   of  a  fiscal  period,   that  is  to  profit  and 
say,  until  the  books  are  closed  at  the  end  of  the  Loss  Ac- 
year.  Co™*- 

The  practice  of  charging  or  crediting  expenses  or  losses  and 
income,  respectively,  direct  to  Profit  and  Loss  Account,  makes 
it  necessary  to  analyze  the  account  in  order  to  allocate  the 
items  contained  therein  for  purposes  of  the  tax  return.  But 
apart  from  this  disadvantage  and  as  a  matter  of  good  accounting, 
Profit  and  Loss  Account  should  contain  no  entries  until  the  close 
of  the  fiscal  period.  In  the  meantime  all  items  of  income  and 
expense  should  be  credited  or  charged  to  accounts  that  by  their 
titles  are  descriptive  of  their  contents. 

After  the  books  have  been  closed  the  balance  of  Profit  and 
Loss  Account  should  be  transferred  either  to  Surplus  or  Impair- 
ment of  Capital  Account,  as  the  case  may  be. 

Dividends  declared  should  be  charged  to  Surplus  Account 
and  credited  to  Dividend  Account  against  which  Dividends 
the  payments  of  dividends  should  be  charged.  Declared. 

For  the  purpose  of  future  reference,  the  net  income  as  shown 


2l6  INCOME   TAX — LAW  AND   ACCOUNTING 

by  the  return  of  net  income  should  be  reconciled  with  the 
Reconcilia-  result  shown  by  Profit  and  Loss  Account.  The 
R°turn  difference,  where  the  return  is  made  for  the  fiscal 
with  Books  year  of  the  corporation,  will  consist  of  such  items  of 
of  Account,  income  as  are  not  taxable,  readjustment  of  book 
values  to  express  appraisal  valuations  or  expenses  or  losses  not 
by  law  deductible. 

Items  are  not  deductible  unless  they  are  charged  off  in  the 
books  of  account  within  the  year  covered  by  the  return. 

"  A  manufacturing  corporation  may  include  as  an  element 
of  the  cost  of  manufactured  products,  the  cost  of  raw 
Manufac-     material,  the  cost  of  labor  of  the  men  who  actually 
tiiring  Cor-  work  on  such  products,  as  well  as  the  cost  of  super- 
porations      visory ,  or  what  may  be  designated  as  '  unproductive 
Cost-*  mg     labor,'  such  as  that  of  the  foremen,  inspectors,  over- 
System,       seers,    etc.,    provided   such    expenditures   are   not 
separately  deducted  from  gross  income  in  the  Return  of 
Annual  Net  Income. 

"The  overhead  charges  referred  to  in  Form  1031  should 
include  the  salaries  of  officers,  clerk  hire,  and  such  other 
office  expenses  as  do  not  have  to  do  directly  with  the  man- 
ufacture of  the  product."  (T.  D.  2152.) 

This  ruling  under  the  old  law,  and  provisions  with  respect  to 
account  keeping  of  the  Act  of  Sept.  8, 1916,  makes  it  possible  for 
manufacturing  corporations  employing  cost-systems,  that  are 
embraced  in  the  general  books  of  account  and  subject  to  proof  as 
to  accuracy,  to  make  their  returns  on  the  basis  of  cost  of  produc- 
tion, as  shown  thereby.  The  form  of  the  return  (1031,  Revised), 
however,  is  not  well  adapted  to  that  kind  of  report.  For  ex- 
ample, it  calls  for  items  under  "Deductions"  that  ordinarily  (ac- 
cording to  opinion  of  the  cost  accountant)  are  charged  to  the 
cost  of  production,  as  rent,  fuel,  light  and  power,  repairs,  pay- 
ments in  lieu  of  rent,  depreciation,  depletion  and  taxes.  Any  of 
these  items  that  are  included  in  the  cost  of  production  through 
the  cost-system,  should  not  again  be  stated  as  deductions. 

Items  that  have  been  included  in  the  cost  of  production  that 
are  separately  provided  for  in  the  report  or  supplementary 
statement  thereof,  should  be  explained  by  a  notation  "  included 
in  cost  of  manufacture."  The  detailed  information  as  to  basis  of 


BOOKKEEPING   SUGGESTIONS  217 

computing  depreciation  and  depletion,  and  amount  of  domestic 
and  foreign  taxes  charged  to  the  period,  should  be  furnished  in 
the  supplementary  statement  even  though  these  items,  or  either 
of  them,  were  included  in  the  cost  of  manufactured  goods. 

Where  interest  on  capital  is  theoretically  added  to  the  cost  of 
production,  such  interest,  for  income  tax  purposes,  must  either 
be  deducted  from  the  cost  of  production  or  separately  stated  as 
income  in  the  return. 

It  is  quite  usual  to  maintain,  in  connection  with  a  modern 
cost-system,  a  " perpetual"  or  "running"  inventory.  Irrespec- 
tive of  the  degree  of  care  with  which  such  inventory  may  be 
operated,  more  or  less  differences  occur  in  the  course  of  time. 
This  necessitates  the  taking  of  physical  inventories  and  the  ad- 
justment of  the  "running"  inventory  therewith.  Physical 
inventories  should  be  taken  and  the  book  inventory  reconciled 
therewith  at  least  once  in  each  fiscal  period. 

The  profit  or  loss  of  a  manufacturing  or  mercantile  business, 
dealing  in  merchandise,  cannot  be  determined  without  stating 
inventories  as  at  the  beginning  and  end  of  the  fiscal  Inventory 
period.  Where  practicable,  it  is  required  that  a  Equivalent, 
physical  inventory — by  actual  count — be  taken.  Equivalent 
inventories  are  acceptable  only  when  stock-taking  by  count  is 
not  obtainable. 

In  order  that  certain  classes  of  corporations  may  arrive 
at  their  correct  income,  it  is  necessary  that  an  inventory, 
or  its  equivalent,  of  materials,  supplies,  and  merchandise 
on  hand  for  use  or  sale  at  the  close  of  each  calendar  year 
shall  be  made  in  order  to  determine  the  gross  income  or  to 
determine  the  expense  of  operation. 

A  physical  inventory  is  at  all  times  preferred,  but  where  a 
physical  inventory  is  impossible  and  an  equivalent  inven- 
tory is  equally  accurate,  the  latter  will  be  acceptable. 

An  equivalent  inventory  is  an  inventory  of  materials, 
supplies,  and  merchandise  on  hand  taken  from  the  books  of 
the  corporation.  (Art.  161,  Reg.  33.) 

It  has  been  ruled  that  materials  and  supplies  purchased  must 
be  credited  with  such  part  thereof  as  has  not  been  Materials 
used  up;  that  is  to  say,  inventory  of  the  unused  and  Sup- 
portion  thereof  must  be  deducted  from  the  pur-  PUes  Used- 


2l8  INCOME  TAX — LAW  AND  ACCOUNTING 

chases  in  computing  the  amount  chargeable  to  expense  or  cost  of 
operations. 

In  ascertaining  expenses  proper  to  be  included  in  the 
deductions  to  be  made  under  the  item  of  "  Expenses," 
corporations  carrying  materials  and  supplies  on  hand  for 
use  should  include  in  such  expenses  the  charges  for  mate- 
rials and  supplies  only  to  the  amount  that  the  same  are 
actually  disbursed  and  used  in  operation  and  maintenance 
during  the  year  for  which  the  return  is  made.  (Art.  123, 
Reg.  33.) 


APPENDIX  A 

FEDERAL  INCOME  TAX  LAW 
ENACTED  SEPTEMBER  8,  1916 

as  amended  by 
the  Acts  of  March  3,  1917,  and  October  3,  1917 

PART  I. — ON  INDIVIDUALS 

SEC.  i.  (a)  That  there  shall  be  levied,  assessed,  collected,  and  paid 
annually  upon  the  entire  net  income  received  in  the  preceding  calendar 
year  from  all  sources  by  every  individual,  a  citizen  or  resident 
of  the  United  States,  a  tax  of  two  per  centum  upon  such  in- 
come;  and  a  like  tax  shall  be  levied,  assessed,  collected,  and 
paid  annually  upon  the  entire  net  income  received  in  the  preceding  calendar 
year  from  all  sources  within  the  United  States  by  every  individual,  a  non- 
resident alien,  including  interest  on  bonds,  notes,  or  other  interest-bearing 
obligations  of  residents,  corporate  or  otherwise. 

(b)  In  addition  to  the  income  tax  imposed  by  subdivision  (a)  of  this 
section  (herein  referred  to  as  the  normal  tax)  there  shall  be  levied,  assessed, 
collected,  and  paid  upon  the  total  net  income  of  every  in- 
dividual,  or,  in  the  case  of  a  nonresident  alien,  the  total  net  £ 
income  received  from  all  sources  within  the  United  States, 
an  additional  income  tax  (herein  referred  to  as  the  additional  tax)  of  one 
per  centum  per  annum  upon  the  payment  by  which  such  total  net  income 
exceeds  $20,000  and  does  not  exceed  $40,000,  two  per  centum  per  annum 
upon  the  amount  by  which  such  total  net  income  exceeds  $40,000  and  does 
not  exceed  $60,000,  three  per  centum  per  annum  upon  the  amount  by  which 
such  total  net  income  exceeds  $60,000  and  does  not  exceed  $80,000,  four 
per  centum  per  annum  upon  the  amount  by  which  such  total  net  income 
exceeds  $80,000  and  does  not  exceed  $100,000,  five  per  centum  per  annum 
upon  the  amount  by  which  such  total  net  income  exceeds  $100,000  and  does 
not  exceed  $150,000,  six  per  centum  per  annum  upon  the  amount  by  which 
such  total  net  income  exceeds  $150,000  and  does  not  exceed  $200,000,  seven 
per  centum  per  annum  upon  the  amount  by  which  such  total  net  income 
exceeds  $200,000  and  does  not  exceed  $250,000,  eight  per  centum  per  annum 
upon  the  amount  by  which  such  total  net  income  exceeds  $250,000  and  does 
not  exceed  $300,000,  nine  per  centum  per  annum  upon  the  amount  by 
which  such  total  net  income  exceeds  $300,000  and  does  not  exceed  $500,000, 
ten  per  centum  per  annum  upon  the  amount  by  which  such  total  net  income, 
exceeds  $500,000,  and  does  not  exceed  $1,000,000,  eleven  per  centum  per 


220  APPENDIX  A 

annum  upon  the  amount  by  which  such  total  net  income  exceeds  $1,000,000 
and  does  not  exceed  $1,500,000,  twelve  per  centum  per  annum  upon  the 
amount  by  which  such  total  net  income  exceeds  $1,500,000  and  does  not 
exceed  $2,000,000,  and  thirteen  per  centum  per  annum  upon  the  amount 
by  which  such  total  net  income  exceeds  $2,000,000. 

For  the  purpose  of  the  additional  tax  there  shall  be  included  as  income 
Dividends  the  income  derived  from  dividends  on  the  capital  stock  or 
Subject  to  from  the  net  earnings  of  any  corporation,  joint-stock  corn- 
Additional  pany  or  association,  or  insurance  company,  except  that  in 
Tax.  the  case  of  non-resident  aliens  such  income  derived  from 

sources  without  the  United  States  shall  not  be  included. 

All  the  provisions  of  this  title  relating  to  the  normal  tax  on  individuals, 
so  far  as  they  are  applicable  and  are  not  inconsistent  with  this  subdivision 
and  section  three,  shall  apply  to  the  imposition,  levy,  assessment,  and  col- 
lection of  the  additional  tax  imposed  under  this  subdivision. 

(c)  The  foregoing  normal  and  additional  tax  rates  shall  apply  to  the 
entire  net  income,  except  as  hereinafter  provided,  received 
^v  every  taxable  person  in  the  calendar  year  nineteen  hun- 
dred and  sixteen  and  in  each  calendar  year  thereafter. 

INCOME  DEFINED 

1  SEC.  2.  (a)  That,  subject  only  to  such  exemptions  and  deductions  as 
are  hereinafter  allowed,  the  net  income  of  a  taxable  person  shall  include 
Net  In-  gains,  profits,  and  income,  derived  from  salaries,  wages,  or 
come  of  compensation  for  personal  service  of  whatever  kind  and  in 
Individuals  whatever  form  paid,  or  from  professions,  vocations,  businesses, 
Defined.  trade,  commerce,  or  sales,  or  dealings  in  property,  whether 
real  or  personal,  growing  out  of  the  ownership  or  use  of  or  interest  in  real 
or  personal  property,  also  from  interest,  rent,  dividends,  securities,  or  the 
transaction  of  any  business  carried  on  for  gain  or  profit,  or  gains  or  profits 
and  income  derived  from  any  source  whatever. 

(b)  Income  received  by  estates  of  deceased  persons  during  the  period 
of  administration  or  settlement  of  the  estate,  shall  be  subject  to  the  normal 
f  and  additional  tax  and  taxed  to  their  estates,  and  also  such 
Estates  income  of  estates  or  any  kind  of  property  held  in  trust,  in- 
cluding such  income  accumulated  in  trust  for  the  benefit  of 
unborn  or  unascertained  persons,  or  persons  with  contingent  interests,  and 
income  held  for  future  distribution  under  the  terms  of  the  will  or  trust  shall 
be  likewise  taxed,  the  tax  in  each  instance,  except  when  the  income  is  re- 
turned for  the  purpose  of  the  tax  by  the  beneficiary,  to  be  assessed  to  the 
executor,  administrator,  or  trustee,  as  the  case  may  be:  Provided,  That 
Individual  where  the  income  is  to  be  distributed  annually  or  regularly 
Share  of  between  existing  heirs  or  legatees,  or  beneficiaries  the  rate  of 
Beneficia-  tax  and  method  of  computing  the  same  shall  be  based  in 
lies.  each  case  upon  the  amount  of  the  individual  share  to  be 

distributed. 

1  Amendment. 


AMENDED  INCOME   TAX  LAW  221 

Such  trustees,  executors,  administrators,  and  other  fiduciaries  are  hereby 
indemnified  against  the  claims  or  demands  of  every  beneficiary  for  all  pay- 
ments of  taxes  which  they  shall  be  required  to  make  under  Indemnity 
the  provisions  of  this  title,  and  they  shall  have  credit  for  to  Fiducia- 
the  amount  of  such  payments  against  the  beneficiary  or  ries. 
principal  in  any  accounting  which  they  make  as  such  trustees  or  other 
fiduciaries. 

(c)  For  the  purpose  of  ascertaining  the  gain  derived  from  Basis  of ^ 
the  sale  or  other  disposition  of  property,  real,  personal,  or  petermin- 
mixed,  acquired  before  March  first,  nineteen  hundred  and  ing  Gain  on 
thirteen,  the  fair  market  price  or  value  of  such  property  Acauired 
as  of  March  first,  nineteen  hundred  and  thirteen,  shall  be  pri^to 
the  basis  for  determining  the  amount  of  such  gain  derived.       March  1 

1913. 

ADDITIONAL  TAX  INCLUDES  UNDISTRIBUTED  PROFITS 

SEC.  3.  For  the  purpose  of  the  additional  tax,  the  taxable  income  of 
any  individual  shall  include  the  share  to  which  he  would  be  entitled  of  the 
gains  and  profits,  if  divided  or  distributed,  whether  divided  Undistrib- 
or  distributed  or  not,  of  all  corporations,  joint-stock  com-   uted  Profits 
panics   or   associations,    or   insurance   companies,    however  Subject    to 
created  or  organized,  formed  or  fraudulently  availed  of  for  Additional 
the  purpose  of  preventing  the  imposition  of  such  tax  through  Tax. 
the  medium  of  permitting  such  gains  and  profits  to  accumulate  instead  of 
being  divided  or  distributed;  and  the  fact  that  any  such  corporation,  joint- 
stock  company  or  association,  or  insurance  company,  is  a  mere  holding  com- 
pany, or  that  the  gains  and  profits  are  permitted  to  accumu-  Unreason- 
late  beyond  the  reasonable  needs  of  the  business,  shall  be  ableAc- 
prima  facie  evidence  of  a  fraudulent  purpose  to  escape  such  cumulation 
tax;  but  the  fact  that  the  gains  and  profits  are  in  any  case  Evidence 
permitted  to  accumulate  and  become  surplus  shall  not  be  °f  Fraud. 
construed  as  evidence  of  a  purpose  to  escape  the  said  tax  in  such  case  unless 
the  Secretary  of  the  Treasury  shall  certify  that  in  his  opinion  such  accumu- 
lation is  unreasonable  for  the  purposes  of  the  business.    When  requested  by 
the  Commissioner  of  Internal  Revenue,  or  any  district  collector  of  internal 
revenue,  such  corporation,  joint-stock  company  or  association,  or  insurance 
company  shall  forward  to  him  a  correct  statement  of  such  gains  and  profits 
and  the  names  and  addresses  of  the  individuals  or  shareholders  who  would 
be  entitled  to  the  same  if  divided  or  distributed. 

INCOME  EXEMPT  FROM  LAW 

1SEC.  4.  The  following  income  shall  be  exempt  from  the  Tax  Ex- 
provisions  of  this  title:  emptln- 

1  The  proceeds  of  life  insurance  policies  paid  to  individual  come. 
beneficiaries  upon  the  death  of  the  insured;  the  amount  re-  Insurance, 
ceived  by  the  insured,  as  a  return  of  premium  or  premiums  paid  by  him 
1  Amendment. 


222  APPENDIX  A 

under  life  insurance,  endowment,  or  annuity  contracts,  either  during  the 
term  or  at  the  maturity  of  the  term  mentioned  in  the  contract  or  upon  sur- 
render of  the  contract;  the  value  of  property  acquired  by  gift,  bequest, 
Gifts,  Be-  devise,  or  descent  (but  the  income  from  such  property  shall 
quests.  be  included  as  income);  interest  upon  the  obligations  of  a 
State  or  any  political  subdivision  thereof  or  upon  the  obligations  of  the 
United  States  (but,  in  the  case  of  obligations  of  the  United  States  issued 
Interest  on  after  September  first,  nineteen  hundred  and  seventeen,  only 
Obligations  if  and  to  the  extent  provided  in  the  Act  authorizing  the  issue 
of  State.  thereof)  or  its  possessions  or  securities  issued  under  the  pro- 
visions of  the  Federal  Farm  Loan  Act  of  July  seventeenth,  nineteen  hun- 
dred and  sixteen;  the  compensation  of  the  present  President  of  the  United 
Salaries  of  States  during  the  term  for  which  he  has  been  elected  and  the 
Certain  judges  of  the  supreme  and  inferior  courts  of  the  United  States 
Public  Offi-  now  in  office,  and  the  compensation  of  all  officers  and  em- 
cialsand  ployees  of  a  State,  or  any  political  subdivision  thereof,  ex- 
Employees.  Cept  when  such  compensation  is  paid  by  the  United  States 
Government. 

DEDUCTIONS  ALLOWED 

SEC.  5.  That  in  computing  net  income  in  the  case  of  a  citizen  or  resident 
Deduc-  of  the  United  States— 

tions.  (a)  For  the  purpose  of  the  tax  there  shall  be  allowed  as 

deductions — 

Necessary  First.  The  necessary  expenses  actually  paid  in  carrying  on 
Expenses,  any  business  or  trade,  not  including  personal,  living,  or  family 
expenses; 

1  Second.  All  interest  paid  within  the  year  on  his  indebtedness  except 
Interest         on  indebtedness  incurred  for  the  purchase  of  obligations  or 
securities  the  interest  upon  which  is  exempt  from  taxation  as 
income  under  this  title; 

1  "Third.  Taxes  paid  within  the  year  imposed  by  the  authority  of  the 
United  States  (except  income  and  excess  profits  taxes)  or  of  its  Territories, 
Taxes  °r  Possessi°ns>  or  any  foreign  country,  or  by  the  authority 

of  any  State,  county,  school  district,  or  municipality,  or 
other  taxing  subdivision  of  any  State,  not  including  those  assessed  against 
local  benefits; 

Fourth.  Losses  actually  sustained  during  the  year,  incurred  in  his  business 
_  .  or  trade,  or  arising  from  fires,  storms,  shipwreck,  or  other 

«,     «  casualty,  and  from  theft,  when  such  losses  are  not  compen- 

sated for  by  insurance  or  otherwise:  Provided,  That  for  the 
Loss  on  purpose  of  ascertaining  the  loss  sustained  from  the  sale  or  other 
Property  disposition  of  property,  real,  personal,  or  mixed,  acquired  be- 
Acquired  fore  March  first,  nineteen  hundred  and  thirteen,  the  fair  mar- 
Prior  to  ket  price  or  value  of  such  property  as  of  March  first,  nine- 
March  1,  teen  hundred  and  thirteen,  shall  be  the  basis  for  determining 
1913.  the  amount  of  such  loss  sustained; 

1  Amendment. 


AMENDED  INCOME   TAX  LAW  223 

Fifth.  In  transactions  entered  into  for  profit  but  not  con- 
nected with  his  business  or  trade,  the  losses  actually  sustained  Losses  not 
therein  during  the  year  to  an  amount  not  exceeding  the  m  Trade. 
profits  arising  therefrom; 

Sixth.  Debts  due  to  the  taxpayer  actually  ascertained  to  Bftd  Det,ts> 
be  worthless  and  charged  off  within  the  year; 

Seventh.  A  reasonable  allowance  for  the  exhaustion,  wear  Deprecia- 
and  tear  of  property  arising  out  of  its  use  or  employment  in  the  tlon- 
business  or  trade; 

Eighth,  (a)  In  the  case  of  oil  and  gas  wells  a  reasonable  allowance  for 
actual  reduction  hi  flow  and  production  to  be  ascertained  not  by  the  flush 
flow,  but  by  the  settled  production  or  regular  flow;  (b)  in  the 
case  of  mines  a  reasonable  allowance  for  depletion  thereof 
not  to  exceed  the  market  value  in  the  mine  of  the  product  thereof,  which 
has  been  mined  and  sold  during  the  year  for  which  the  return  and  computa- 
tion are  made,  such  reasonable  allowance  to  be  made  in  the  case  of  both 
(a)  and  (b)  under  rules  and  regulations  to  be  prescribed  by  the  Secretary 
of  the  Treasury:  Provided,  That  when  the  allowances  au-  Limitation 
thorized  in  (a)  and  (b)  shall  equal  the  capital  originally  in-   of  Deple- 
vested,  or  in  case  of  purchase  made  prior  to  March  first,   tion. 
nineteen  hundred  and  thirteen,  the  fair  market  value  as  of  that  date,  no 
further  allowance  shall  be  made.     No  deduction  shall  be  Improve- 
allowed  for  any  amount  paid  out  for  new  buildings,  permanent  ments    not 
improvements,  or  betterments,  made  to  increase  the  value  of  Deducti- 
any  property  or  estate,  and  no  deduction  shall  be  made  for  ble. 
any  amount  of  expense  of  restoring  property  or  making  good  the  exhaustion 
thereof  for  which  an  allowance  is  or  has  been  made. 

1  Ninth.  Contributions  or  gifts  actually  made  within  the  year  to  cor- 
porations or  associations  organized  and  operated  exclusively  for  religious, 
charitable,  scientific,  or  educational  purposes,  or  to  societies   Contribu- 
tor the  prevention  of  cruelty  to  children  or  animals,  no  part  tions  to 
of  the  net  income  of  which  inures  to  the  benefit  of  any  private   Charities. 
stockholder  or  individual,  to  an  amount  not  in  excess  of  fifteen  per  centum 
of  the  taxpayer's  taxable  net  income  as  computed  without  the  benefit  of 
this  paragraph.    Such  contributions  or  gifts  shall  be  allowable  as  deduc- 
tions only  if  verified  under  rules  and  regulations  prescribed  by  the  Com- 
missioner of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the 
Treasury. 

CREDITS  ALLOWED 

(b)  For  the  purpose  of  the  normal  tax  only,  the  income  embraced  hi  a 
personal  return  shall  be  credited  with  the  amount  received  Normal 
as  dividends  upon  the  stock  or  from  the  net  earnings  of  any  Tax    Cred- 
corporation,  joint-stock  company  or  association,  trustee,  or  its. 
insurance  company,  which  is  taxable  upon  its  net  income  as  hereinafter 
provided: 

1  Amendment. 


224  APPENDIX  A 

Dividends}  (c)  A  like  credit  shall  be  allowed  as  to  the  amount  of  in- 

Taxes  come,  the  normal  tax  upon  which  has  been  paid  or  withheld 

Withheld,  for  payment  at  the  source  of  the  income  under  the  provisions 
of  this  title. 

NONRESIDENT  ALIENS 

Deductions      SEC.  6.  That  in  computing  net  income  in  the  case  of  a  non- 
Nonresi-       resident  alien — 

ident  (a)  For  the  purpose  of  the  tax  there  shall  be  allowed  as 

Aliens.          deductions- 
First.  The  necessary  expenses  actually  paid  in  carrying  on  any  business 
Necessary     or  trade  conducted  by  him  within  the  United  States,  not 
Expenses,     including  personal,  living,  or  family  expenses; 

1  Second.  The  proportion  of  all  interest  paid  within  the  year  by  such 
person  on  his  indebtedness  (except  on  indebtedness  incurred  for  the  pur- 
Interest  c^ase  °f  obligations  or  securities  the  interest  upon  which  is 
exempt  from  taxation  as  income  under  this  title)  which  the 
gross  amount  of  his  income  for  the  year  derived  from  sources  within  the 
United  States  bears  to  the  gross  amount  of  his  income  for  the  year  derived 
from  all  sources  within  and  without  the  United  States,  but  this  deduction 
shall  be  allowed  only  if  such  person  includes  in  the  return  required  by  sec- 
tion eight  all  the  information  necessary  for  its  calculation; 

Third.  Taxes  paid  within  the  year  imposed  by  the  authority  of  the 
United  States  (except  income  and  excess  profits  taxes),  or  of  its  Territories, 
Taxes  or  Possess*ons>  or  ky  the  authority  of  any  State,  county, 

school  district,  or  municipality,  or  other  taxing  subdivision 
of  any  State,  paid  within  the  United  States,  not  including  those  assessed 
against  local  benefits; 

Fourth.  Losses  actually  sustained  during  the  year,  incurred  in  business 
or  trade  conducted  by  him  within  the  United  States,  and  losses  of  property 
T  _  within  the  United  States  arising  from  fires,  storm,  shipwreck, 

or  other  casualty,  and  from  theft,  when  such  losses  are  not 
compensated  for  by  insurance  or  otherwise:  Provided,  That  for  the  purpose 
of  ascertaining  the  amount  of  such  loss  or  losses  sustained  in  trade,  or  specu- 
Ascertain-  lative  transactions  not  in  trade,  from  the  same  or  any  kind 
ing  Amount  of  property  acquired  before  March  first,  nineteen  hundred 
of  Loss.  and  thirteen,  the  fair  market  price  or  value  of  such  property 
as  of  March  first,  nineteen  hundred  and  thirteen,  shall  be  the  basis  for  deter- 
mining the  amount  of  such  loss  or  losses  sustained; 

Fifth.  In  transactions  entered  into  for  profit  but  not  connected  with 
Losses  not  his  business  or  trade,  the  losses  actually  sustained  therein 
in  Trade.  during  the  year  to  an  amount  not  exceeding  the  profits  aris- 
ing therefrom  in  the  United  States; 

Sixth.  Debts  arising  in  the  course  of  business  or  trade  conducted  by  him 
B  A  D  ht      within  the  United  States  due  to  the  taxpayer  actually  ascer- 
*  tained  to  be  worthless  and  charged  off  within  the  year; 
1  Amendment. 


AMENDED  INCOME   TAX  LAW  225 

Seventh.  A  reasonable  allowance  for  the  exhaustion,  wear  and  tear  of 
property  within  the  United  States  arising  out  of  its  use  or  employment  in 
the  business  or  trade;  (a)  in  the  case  of  oil  and  gas  wells  a 
reasonable  allowance  for  actual  reduction  in  flow  and  produc-   ..    ^ 
tion  to  be  ascertained  not  by  the  flush  flow,  but  by  the  settled 
production  or  regular  flow;  (b)  in  the  case  of  mines  a  reasonable  allowance 
for  depletion  thereof  not  to  exceed  the  market  value  in  the  mine  of  the 
product  thereof,  which  has  been  mined  and  sold  during  the  year  for  which 
the  return  and  computation  are  made,  such  reasonable  allowance  to  be 
made  in  the  case  of  both  (a)  and  (b)  under  rules  and  regulations  to  be  pre- 
scribed by  the  Secretary  of  the  Treasury:  Provided,  That  when  Limitation 
the  allowance  authorized  in  (a)  and  (b)  shall  equal  the  capital   of  Deple- 
originally  invested,  or  in  case  of  purchase  made  prior  to  tion. 
March  first,  nineteen  hundred  and  thirteen,  the  fair  market  value  as  of 
that  date,  no  further  allowance  shall  be  made.     No  deduction  shall  be 
allowed  for  any  amount  paid  out  for  new  buildings,  per-  Improve- 
manent   improvements,   or  betterments,   made   to  increase  mentsnot 
the  value  of  any  property  or  estate,  and  no  deduction  shall  Deducti- 
be  made  for  any  amount  of  expense  of  restoring  property  or  ble. 
making  good  the  exhaustion  thereof  for  which  an  allowance  is  or  has  been 
made. 

(b)  There  shall  also  be  allowed  the  credits  specified  by 
subdivisions  (b)  and  (c)  of  section  five. 

1  (c)  A  nonresident  alien  individual  shall  receive  the  benefit  of  the  de- 
ductions and  credits  provided  for  in  this  section  only  by  filing  or  causing 
to  be  filed  with  the  collector  of  internal  revenue  a  true  and  Deductions 
accurate  return  of  his  total  income,  received  from  all  sources,   Contingent 
corporate  or  otherwise,  in  the  United  States,  in  the  manner  on  Filing 
prescribed  by  this  title;  and  in  case  of  his  failure  to  file  such  Return. 
return  the  collector  shall  collect  the  tax  on  such  income,  and  all  property 
belonging  to  such  nonresident  alien  individual  shall  be  liable  to  distraint 
for  the  tax. 

PERSONAL  EXEMPTION 

1  SEC.  7.  That  for  the  purpose  of  the  normal  tax  only,  there  shall  be  al- 
lowed as  an  exemption  in  the  nature  of  a  deduction  from  the  amount  of 
the  net  income  of  each  citizen  or  resident  of  the  United  States,   Specific 
ascertained  as  provided  herein,  the  sum  of  $3,000,  plus  $1,000  Exemp- 
additional  if  the  person  making  the  return  be  a  head  of  a  tions,    Citi- 
family  or  a  married  man  with  a  wife  living  with  him,  or  plus  zensand 
the  sum  of  $1,000  additional  if  the  person  making  the  return  Residents 
be  a  married  woman  with  a  husband  living  with  her;  but  in  onty* 
no  event  shall  this  additional  exemption  of  $1,000  be  deducted  by  both  a 
husband  and  a  wife:  Provided,  That  only  one  deduction  of  $4,000  shall  be 
made  from  the  aggregate  income  of  both  husband  and  wife  when  living 
together:  Provided  further,  That  if  the  person  making  the  return  is  the  head 

1  Amendment. 


226  APPENDIX  A 

of  a  family  there  shall  be  an  additional  exemption  of  $200  for  each  child 
dependent  upon  such  person,  if  under  eighteen  years  of  age,  or  if  incapable 
of  self-support  because  mentally  or  physically  defective,  but  this  provision 
shall  operate  only  in  the  case  of  one  parent  in  the  same  family:  Provided 
further,  That  guardians  or  trustees  shall  be  allowed  to  make  this  personal 
exemption  as  to  income  derived  from  the  property  of  which  such  guardian 
or  trustee  has  charge  in  favor  of  each  ward  or  cestui  que  trust:  Provided 
further,  That  in  no  event  shall  a  ward  or  cestui  que  trust  be  allowed  a  greater 
personal  exemption  than  as  provided  in  this  section,  from  the  amount  of 
net  income  received  from  all  sources.  There  shall  also  be  allowed  an  exemp- 
tion from  the  amount  of  the  net  income  of  estates  of  deceased  citizens  or 
residents  of  the  United  States  during  the  period  of  administration  or  settle- 
ment, and  of  trust  or  other  estates  of  citizens  or  residents  of  the  United 
States  the  income  of  which  is  not  distributed  annually  or  regularly  under 
the  provisions  of  subdivision  (b)  of  section  two,  the  sum  of  $3,000,  including 
such  deductions  as  are  allowed  under  section  five. 

RETURNS 

Returns  of  SEC.  8.  (a)  The  tax  shall  be  computed  upon  the  net  income, 
Net  In-  as  thus  ascertained,  of  each  person  subject  thereto,  received 
come.  in  each  preceding  calendar  year  ending  December  thirty-first, 

(b)  On  or  before  the  first  day  of  March,  nineteen  hundred  and  seventeen, 
and  the  first  day  of  March  in  each  year  thereafter,  a  true  and  accurate 
When  and  return  under  oath  shall  be  made  by  each  person  of  lawful 
With  age,  except  as  hereinafter  provided,  having  a  net  income  of 

Whom  $3,000  or  over  for  the  taxable  year  to  the  collector  of  internal 

to  File  Re-  revenue  for  the  district  in  which  such  person  has  his  legal 
turn.  residence  or  principal  place  of  business,  or  if  there  be  no  legal 

residence  or  place  of  business  in  the  United  States,  then  with  the  collector 
of  internal  revenue  at  Baltimore,  Maryland,  in  such  form  as  the  Commis- 
sioner of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the  Treas- 
ury, shall  prescribe,  setting  forth  specifically  the  gross  amount  of  income 
from  all  separate  sources,  and  from  the  total  thereof  deducting  the  aggre- 
gate items  of  allowances  herein  authorized;  Provided,  That  the  Commis- 
Extension  sioner  of  Internal  Revenue  shall  have  authority  to  grant  a 
of  Time  to  reasonable  extension  of  time,  in  meritorious  cases,  for  filing 
File  Re-  returns  of  income  by  persons  residing  or  traveling  abroad 
turn.  who  are  required  to  make  and  file  returns  of  income  and  who 

are  unable  to  file  said  returns  on  or  before  March  first  of  each  year:  Pro- 
vided further,  That  the  aforesaid  return  may  be  made  by  an  agent  when  by 
reason  of  illness,  absence,  or  nonresidence  the  person  liable 
for  g^  return  js  unable  to  make  and  render  the  same,  the 
agent  assuming  the  responsibility  of  making  the  return  and 
incurring  penalties  provided  for  erroneous,  false,  or  fraudulent  return. 
1  (c)  Guardians,    trustees,    executors,    administrators,    receivers,    con- 

1  Amendment. 


AMENDED  INCOME  TAX  LAW  227 

servators,  and  all  persons,  corporations,  or  associations,  acting  in  any  fidu- 
ciary capacity,  shall  make  and  render  a  return  of  the  income   Returns  by 
of  the  person,  trust,  or  estate  for  whom  or  which  they  act,   Guardians, 
and  be  subject  to  all  the  provisions  of  this  title  which  apply  Trustees, 
to  individuals.    Such  fiduciary  shall  make  oath  that  he  has  Receivers. 
sufficient  knowledge  of  the  affairs  of  such  person,  trust,  or  estate  to  enable 
him  to  make  such  return  and  that  the  same  is,  to  the  best  of  his  knowledge 
and  belief,  true  and  correct,  and  be  subject  to  all  the  provisions  of  this 
title  which  apply  to  individuals:  Provided,  That  a  return  p., 
made  by  one  of  two  or  more  joint  fiduciaries  filed  in  the  dis-  cjarjes 
trict  where  such  fiduciary  resides,  under  such  regulations  as 
the  Secretary  of  the  Treasury  may  prescribe,  shall  be  a  sufficient  compliance 
with  the  requirements  of  this  paragraph:  Provided  further,  That  no  return 
of  income  not  exceeding  $3,000  shall  be  required  except  as  in  this  title  other- 
wise provided. 

(d)  Repealed. 

1  (e)  Persons  carrying  on  business  in  partnership  shall  be  liable  for  in- 
come tax  only  in  their  individual  capacity,  and  the  share  of  the  profits  of 
the  partnership  to  which  any  taxable  partner  would  be  en- 
titled  if  the  same  were  divided,  whether  divided  or  other- 
wise,  shall  be  returned  for  taxation  and  the  tax  paid  under 
the  provisions  of  this  title:  Provided,  That  from  the  net  distributive  interests 
on  which  the  individual  members  shall  be  liable  for  tax,  normal  and  addi- 
tional, there  shall   be   excluded  their  proportionate  shares  Interest  on 
received  from  interests  on  the  obligations  of  a  State  or  any  State    Ob- 
political  or  taxing  subdivision  thereof,  and  upon  the  obliga-  ligations 
tions  of  the  United  States  (if  and  to  the  extent  that  it  is  pro-  Excluded. 
vided  in  the  Act  authorizing  the  issue  of  such  obligations  of  the  United 
States  that  they  are  exempt  from  taxation),  and  its  possessions,  and  that 
for  the  purpose  of  computing  the  normal  tax  there  shall  be  allowed  a  credit, 
as  provided  by  section  five,  subdivision  (b),  for  their  proportionate  share 
of  the  profits  derived  from  dividends.     Such  partnership,  Returns  by 
when  requested  by  the  Commissioner  of  Internal  Revenue  Partner- 
or  any  district  collector,  shall  render  a  correct  return  of  the  ships. 
earnings,  profits,  and  income  of  the  partnership,  except  income  exempt 
under  section  four  of  this  Act,  setting  forth  the  item  of  the  gross  income 
and  the  deductions  and  credits  allowed  by  this  title,  and  the  names  and 
addresses  of  the  individuals  who  would  be  entitled  to  the  net  earnings, 
profits,  and  income,  if  distributed.     A  partnership  shall  have  the  same 
privilege  of  fixing  and  making  returns  upon  the  basis  of  its  own  fiscal  year 
as  is  accorded  to  corporations  under  this  title.     If  a  fiscal 
year  ends  during  nineteen  hundred  and  sixteen  or  a  subsequent  ^lscal 
calendar  year  for  which  there  is  a  rate  of  tax  different  from 
the  rate  for  the  preceding  calendar  year,  then  (i)  the  rate  for  such  preceding 
calendar  year  shall  apply  to  an  amount  of  each  partner's  share  of  such 
partnership  profits  equal  to  the  proportion  which  the  part  of  such  fiscal 

1  Amendment. 


228  APPENDIX  A 

year  falling  within  such  calendar  year  bears  to  the  full  fiscal  year,  and  (?) 
the  rate  for  the  calendar  year  during  which  such  fiscal  year  ends  shall  apply 
to  the  remainder. 

(f)  In  every  return  shall  be  included  the  income  derived  from  dividends 
Dividends     on  the  capital  stock  or  from  the  net  earnings  of  any  corpora- 
Returna-       tion,  joint-stock  company  or  association,  or  insurance  com- 
ble.  pany,  except  that  in  the  case  of  nonresident  aliens  such  income 
derived  from  sources  without  the  United  States  shall  not  be  included. 

(g)  An  individual  keeping  accounts  upon  any  basis  other  than  that  of 
actual  receipts  and  disbursements,  unless  such  other  basis  does  not  clearly 
Basis  of         reflect  his  income,  may,  subject  to  regulations  made  by  the 
Keeping        Commissioner  of  Internal  Revenue,  with  the  approval  of 
Accounts,      the  Secretary  of  the  Treasury,  make  his  return  upon  the 
basis  upon  which  his  accounts  are  kept,  in  which  case  the  tax  shall  be  com- 
puted upon  his  income  as  so  returned. 

ASSESSMENT  AND  ADMINISTRATION 

SEC.  9.  (a)  That  all  assessments  shall  be  made  by  the  Commissioner  of 
Internal  Revenue  and  all  persons  shall  be  notified  of  the  amount  for  which 
__  _  they  are  respectively  liable  on  or  before  the  first  day  of  June 
•p  n  bl  °*  eack  success*ve  vear>  and  said  amounts  shall  be  paid  on 
or  before  the  fifteenth  day  of  June,  except  in  cases  of  refusal 
or  neglect  to  make  such  return  and  in  cases  of  erroneous,  false,  or  fraudulent 
returns,  in  which  cases  the  Commissioner  of  Internal  Revenue  shall,  upon 
the  discovery  thereof,  at  any  time  within  three  years  after  said  return  is 
due,  or  has  been  made,  make  a  return  upon  information  obtained  as  provided 
for  in  this  title  or  by  existing  law,  or  require  the  necessary  corrections  to 
be  made,  and  the  assessment  made  by  the  Commissioner  of  Internal  Revenue 
thereon  shall  be  paid  by  such  person  or  persons  immediately  upon  notifica- 
tion of  the  amount  of  such  assessment;  and  to  any  sum  or  sums  due  and 
unpaid  after  the  fifteenth  day  of  June  in  any  year,  and  for  ten  days  after 
notice  and  demand  thereof  by  the  collector,  there  shall  be  added  the  sum 
Penalty  of  five  per  centum  on  the  amount  of  tax  unpaid,  and  interest 
Delayed  at  the  rate  of  one  per  centum  per  month  upon  said  tax  from 
Payments,  the  tune  the  same  became  due,  except  from  the  estates  of 
insane,  deceased,  or  insolvent  persons. 

1  (b)  All  persons,  corporations,  partnerships,  associations,  and  insurance 
companies,  in  whatever  capacity  acting,  including  lessees  or  mortgagors 
Withhold-  °f  real  or  personal  property,  trustees  acting  in  any  trust 
ing  Tax  on  capacity,  executors,  administrators,  receivers,  conservators, 
Income  of  employers,  and  all  officers  and  employees  of  the  United  States, 
Nonres-  having  the  control,  receipt,  custody,  disposal  or  payment 
ident  Of  interest,  rent,  salaries,  wages,  premiums,  annuities,  corn- 

Aliens,  pensation,  remuneration,  emoluments,  or  other  fixed  or  de- 

terminable  annual  or  periodical  gains,  profits,  and  income  of  any  nonresident 

1  Amendment. 


AMENDED   INCOME   TAX   LAW  22Q 

alien  individual,  other  than  income  derived  from  dividends  on  capital 
stock,  or  from  the  net  earnings  of  a  corporation,  joint-stock  Exclusive 
company   or  association,   or  insurance   company,   which   is  ofDivi- 
taxable  upon  its  net  income  as  provided  in  this  title,  are   (lends. 
hereby  authorized  and  required  to  deduct  and  withhold  from  such  annual 
or  periodical  gains,  profits,  and  income  such  sum  as  will  be  sufficient  to  pay 
the  normal  tax  imposed  thereon  by  this  title,  and  shall  make  return  thereof 
on  or  before  March  first  of  each  year  and,  on  or  before  the  time  fixed  by 
law  for  the  payment  of  the  tax,  shall  pay  the  amount  withheld  to  the  officer 
of  the  United  States  Government  authorized  to  receive  the  same;  and 
they  are  each  hereby  made  personally  liable  for  such  tax,  and    they 
are  each  hereby  indemnified  against  every  person,  corporation,  partnership, 
association,  or  insurance  company,  or  demand  whatsoever  for  all  payments 
which  they  shall  make  in  pursuance  and  by  virtue  of  this  title. 

1  (c)  The  amount  of  the  normal  tax  hereinbefore  imposed  shall  also  be 
deducted  and  withheld  from  fixed  or  determinable  annual  or  periodical 
gains,  profits  and  income  derived  from  interest  upon  bonds  Withhold- 
and  mortgages,  or  deeds  of  trust  or  other  similar  obligations  fog  T^  on 
of  corporations,  joint-stock  companies,  associations,  and  in-  Interest  on 
surance  companies,  (if  such  bonds,  mortgages,  or  other  obliga-  Bonds  con- 
tions  contain  a  contract  or  provision  by  which  the  obligor  taining 
agrees  to  pay  any  portion  of  the  tax  imposed  by  this  title  Tax-free 
upon  the  obligee  or  to  reimburse  the  obligee  for  any  portion   Covenant, 
of  the  tax  or  to  pay  the  interest  without  deduction  for  any  tax  which  the 
obligor  may  be  required  or  permitted  to  pay  thereon  or  to  retain  therefrom 
under  any  law  of  the  United  States)  whether  payable  annually  or  at  shorter 
or  longer  periods  and  whether  such  interest  is  payable  to  a  nonresident 
alien  individual  or  to  an  individual  citizen  or  resident  of  the  United  States, 
subject  to  the  provisions  of  the  foregoing  subdivision  (b)  of  this  section 
requiring  the  tax  to  be  withheld  at  the  source  and  deducted  from  annual 
income  and  returned  and  paid  to  the  Government,  unless  the  person  entitled 
to  receive  such  interest  shall  file  with  the  withholding  agent,  on  or  before 
February  first,  a  signed  notice  in  writing  claiming  the  benefit  of  an  exemp- 
tion under  section  seven  of  this  Title. 

(d)  Repealed. 

(e)  Repealed. 

*(f)  All   persons,   corporations,   partnerships,    or   associations,    under- 
taking as  a  matter  of  business  or  for  profit  the  collection  of  foreign  pay- 
ments of  interest  or  dividends  by  means  of  coupons,  checks,  License 
or  bills  of  exchange  shall  obtain  a  license  from  the  Commis-   Required 
sioner  of  Internal  Revenue,  and  shall  be  subject  to  such  regu-  by    Collec- 
lations  enabling  the  Government  to  obtain  the  information  tors  of  For- 
required  under  this  title,  as  the  Commissioner  of  Internal  eign  Pay- 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury,   ments- 
shall  prescribe;  and  whoever  knowingly  undertakes  to  collect  such  pay- 
ments as  aforesaid  without  having  obtained  a  license  therefor,  or  without 

1  Amendment. 


230  APPENDIX  A 

complying  with  such  regulations,  shall  be  deemed  guilty  of  a  misdemeanor 
and  for  each  offense  be  fined  in  a  sum  not  exceeding  $5,000,  or  im- 
prisoned for  a  term  not  exceeding  one  year,  or  both,  hi  the  discretion  of  the 
court. 

(g)  The  tax  herein  imposed  upon  gains,  profits,  and  incomes  not  falling 
General  under  the  foregoing  and  not  returned  and  paid  by  virtue  of 
Assess-  the  foregoing  or  as  otherwise  provided  by  law  shall  be  as- 
ment  of  In-  sessed  by  personal  return  under  rules  and  regulations  to  be 
come.  prescribed  by  the  Commissioner  of  Internal  Revenue  and 

approved  by  the  Secretary  of  the  Treasury.    The  intent  and  purpose  of 
this  title  is  that  all  gains,  profits,  and  income  of  a  taxable 

theLaw  class>  as  defined  b^  this  title>  sha11  be  charged  and  assessed 
with  the  corresponding  tax,  normal  and  additional,  prescribed 
by  this  title,  and  said  tax  shall  be  paid  by  the  owner  of  such  income,  or  the 
proper  representative  having  the  receipt,  custody,  control,  or  disposal  of 
the  same.  For  the  purpose  of  this  title  ownership  or  liability  shall  be  deter- 
mined as  of  the  year  for  which  a  return  is  required  to  be  rendered. 
Withhold-  ^e  Provisi°ns  °f  this  section,  except  subdivision  (c),  re- 
ing  Applies  lating  to  the  deduction  and  payment  of  the  tax  at  the  source 
only  to  °f  income  shall  only  apply  to  the  normal  tax  hereinbefore 

Normal  Tax.  imposed  upon  nonresident  alien  individuals. 

PART  II. — ON  CORPORATIONS 

1  SEC.  10.  (a)  That  there  shall  be  levied,  assessed,  collected,  and  paid 
annually  upon  the  total  net  income  received  in  the  preceding  calendar 
Income  of  year  from  all  sources  by  every  corporation,  joint-stock  corn- 
Corpora-  pany  or  association,  or  insurance  company,  organized  in  the 
tions.  United  States,  no  matter  how  created  or  organized,  but  not 

including  partnerships,  a  tax  of  two  per  centum  upon  such  income;  and 
a  like  tax  shall  be  levied,  assessed,  collected,  and  paid  annually  upon  the 
total  net  income  received  in  the  preceding  calendar  year 
from  all  sources  within  the  United  States  by  every  corpora- 
tion, joint-stock  company  or  association,  or  insurance  company,  organized, 
authorized,  or  existing  under  the  laws  of  any  foreign  country,  including  in- 
terest on  bonds,  notes,  or  other  interest-bearing  obligations  of  residents, 
corporate  or  otherwise,  and  including  the  income  derived  from  dividends 
on  capital  stock  or  from  net  earnings  of  resident  corporations,  joint-stock 
companies  or  associations,  or  insurance  companies,  whose  net  income  is 
taxable  under  this  title. 

The  foregoing  tax  rate  shall  apply  to  the  total  net  income  received  by 
every  taxable  corporation,  joint-stock  company  or  association,  or  insurance 
Calendar  company  in  the  calendar  year  nineteen  hundred  and  sixteen 
or  Fiscal  and  in  each  year  thereafter,  except  that  if  it  has  fixed  its 
Year.  own  fiscal  year  under  the  provisions  of  existing  law,  the  fore- 

going rate  shall  apply  to  the  proportion  of  the  total  net  income  returned 

1  Amendment. 


AMENDED  INCOME  TAX  LAW  23! 

for  the  fiscal  year  ending  prior  to  December  thirty-first,  nineteen  hundred 
and  sixteen,  which  the  period  between  January  first,  nineteen  hundred  and 
sixteen,  and  the  end  of  such  fiscal  year  bears  to  the  whole  of  such  fiscal 
year,  and  the  rate  fixed  in  Section  II  of  the  Act  approved  October  third, 
nineteen  hundred  and  thirteen,  entitled  "An  Act  to  reduce  tariff  duties 
and  to  provide  revenue  for  the  Government,  and  for  other  purposes,"  shall 
apply  to  the  remaining  portion  of  the  total  net  income  returned  for  such 
fiscal  year. 

For  the  purpose  of  ascertaining  the  gain  derived  or  loss  sustained  from 
the  sale  or  other  disposition  by  a  corporation,  joint-stock  company  or  as- 
sociation, or  insurance  company,  of  property,  real,  personal,  Ascertain- 
or  mixed,  acquired  before  March  first,  nineteen  hundred  and  ing  Profit 
thirteen,  the  fair  market  price  or  value  of  such  property  as  or  Loss. 
of  March  first,  nineteen  hundred  and  thirteen,  shall  be  the  basis  for  deter- 
mining the  amount  of  such  gain  derived  or  loss  sustained. 

1  (b)  In  addition  to  the  income  tax  imposed  by  subdivision  (a)  of  this 
section  there  shall  be  levied,  assessed,  collected,  and  paid  annually  an  addi- 
tional tax  of  ten  per  centum  upon  the  amount,  remaining  Undistrib- 
undistributed  six  months  after  the  end  of  each  calendar  or  uted  Profits 
fiscal  year,  of  the  total  net  income  of  every  corporation,  joint-  Tax  on 
stock  company  or  association,  or  insurance  company,  received   Corpora- 
during  the  year,  as  determined  for  the  purposes  of  the  tax  tions. 
imposed  by  such  subdivision  (a),  but  not  including  the  amount  of  any  income 
taxes  paid  by  it  within  the  year  imposed  by  the  authority  of  the  United 
States. 

1  The  tax  imposed  by  this  subdivision  shall  not  apply  to  that  portion 
of  such  undistributed  net  income  which  is  actually  invested   Certain  In- 
and  employed  in  the  business  or  is  retained  for  employment  vested    In- 
in  the  reasonable  requirements  of  the  business  or  is  invested  come     Ex- 
in  obligations  of  the  United  States  issued  after  September  empt. 
first,  nineteen  hundred  and  seventeen:  Provided,  That  if  the  Secretary  of 
the  Treasury  ascertains  and  finds  that  any  portion  of  such 
amount  so  retained  at  any  time  for  employment  in  the  business  ~d(llt:i 
is  not  so  employed  or  is  not  reasonably  required  in  the  business 
a  tax  of  fifteen  per  centum  shall  be  levied,  assessed,  collected,  and  paid 
thereon. 

1  The  foregoing  tax  rates  shall  apply  to  the  undistributed  net  income 
received  by  every  taxable  corporation,  joint-stock  company  or  association, 
or  insurance  company  in  the  calendar  year  nineteen  hundred   Applicable 
and  seventeen  and  in  each  year  thereafter,  except  that  if  it  to  Year 
has  fixed  its  own  fiscal  year  under  the  provisions  of  existing   1917  and 
law,  the  foregoing  rates  shall  apply  to  the  proportion  of  the  Thereafter. 
taxable  undistributed  net  income  returned  for  the  fiscal  year  ending  prior 
to  December  thirty-first,  nineteen  hundred  and  seventeen,  which  the  period 
between  January  first,  nineteen  hundred  and  seventeen,  and  the  end  of 
such  fiscal  year  bears  to  the  whole  of  such  fiscal  year. 

1  Amendment. 


232  APPENDIX  A 

CONDITIONAL  AND  OTHER  EXEMPTIONS 

SEC.  ii.  (a)  That  there  shall  not  be  taxed  under  this  title  any  income 
Organiza-  received  by  any — 

tionsNot  First.    Labor,  agricultural,  or  horticultural  organization. 

Taxable.  Second.  Mutual  savings  bank  not  having  a  capital  stock 

represented  by  shares; 

Third.  Fraternal  beneficiary  society,  order,  or  association,  operating 
under  the  lodge  system  or  for  the  exclusive  benefit  of  the  members  of  a 
fraternity  itself  operating  under  the  lodge  system,  and  providing  for  the 
payment  of  life,  sick,  accident,  or  other  benefits  to  the  members  of  such 
society,  order,  or  association  or  their  dependents; 

Fourth.  Domestic  building  and  loan  association  and  cooperative  banks 
without  capital  stock  organized  and  operated  for  mutual  purposes  and  with- 
out profit; 

Fifth.  Cemetery  company  owned  and  operated  exclusively  for  the  benefit 
of  its  members; 

Sixth.  Corporation  or  association  organized  and  operated  exclusively 
for  religious,  charitable,  scientific,  or  educational  purposes,  no  part  of  the 
net  income  of  which  inures  to  the  benefit  of  any  private  stockholder  or  in- 
dividual; 

Seventh.  Business  league,  chamber  of  commerce,  or  board  of  trade,  not 
organized  for  profit  and  no  part  of  the  net  income  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual; 

Eighth.  Civic  league  or  organization  not  organized  for  profit  but  operated 
exclusively  for  the  promotion  of  social  welfare; 

Ninth.  Club  organized  and  operated  exclusively  for  pleasure,  recreation, 
and  other  nonprofitable  purposes,  no  part  of  the  net  income  of  which  inures 
to  the  benefit  of  any  private  stockholder  or  member; 

Tenth.  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insurance  company, 
mutual  ditch  or  irrigation  company,  mutual  or  cooperative  telephone  com- 
pany, or  like  organization  of  a  purely  local  character,  the  income  of  which 
consists  solely  of  assessments,  dues,  and  fees  collected  from  members  for 
the  sole  purpose  of  meeting  its  expenses; 

Eleventh.  Farmers',  fruit  growers',  or  like  association,  organized  and 
operated  as  a  sales  agent  for  the  purpose  of  marketing  the  products  of  its 
members  and  turning  back  to  them  the  proceeds  of  sales,  less  the  neces- 
sary selling  expenses,  on  the  basis  of  the  quantity  of  produce  furnished  by 
them; 

Twelfth.  Corporation  or  association  organized  for  the  exclusive  purpose 
of  holding  title  to  property,  collecting  income  therefrom,  and  turning  over 
the  entire  amount  thereof,  less  expenses,  to  an  organization  which  itself 
is  exempt  from  the  tax  imposed  by  this  title;  or 

Thirteenth.  Federal  land  banks  and  national  farm-loan  associations  as 
provided  in  section  twenty-six  of  the  Act  approved  July  seventeenth,  nine- 
teen hundred  and  sixteen,  entitled  "An  Act  to  provide  capital  for  agricul- 
tural development,  to  create  standard  forms  of  investment  based  upon  farm 
mortgage,  to  equalize  rates  of  interest  upon  farm  loans,  to  furnish  a  market 


AMENDED  INCOME   TAX  LAW  233 

for  United  States  bonds,  to  create  Government  depositaries  and  financial 
agents  for  the  United  States,  and  for  other  purposes." 

Fourteenth.  Joint-stock  land  banks  as  to  income  derived  from  bonds  or 
debentures  of  other  joint-stock  land  banks  or  any  Federal  land  bank  be- 
longing to  such  joint-stock  land  bank. 

(b)  There  shall  not  be  taxed  under  this  title  any  income  derived  from  any 
public  utility  or  from  the  exercise  of  any  essential  governmental  function 
accruing  to  any  State,  Territory,  or  the  District  of  Columbia,  Income 
or  any  political  subdivision  of  a  State  or  Territory,  nor  any  from  Pub- 
income  accruing  to  the  government  of  the  Philippine  Islands  lie  Utility, 
or  Porto  Rico,  or  of  any  political  subdivision  of  the  Philippine  Islands  or 
Porto  Rico:  Provided,  That  whenever  any  State,  Territory,  or  the  District 
of  Columbia,  or  any  political  subdivision  of  a  State  or  Terri-  State  and 
tory,  has,  prior  to  the  passage  of  this  title,  entered  in  good   Municipal 
faith  into  a  contract  with  any  person  or  corporation,  the  Income 
object  and  purpose  of  which  is  to  acquire,  construct,  operate,   Exempt, 
or  maintain  a  public  utility,  no  tax  shall  be  levied  under  the  provisions  of 
this  title  upon  the  income  derived  from  the  operation  of  such  public  utility, 
so  far  as  the  payment  thereof  will  impose  a  loss  or  burden  upon  such  State, 
Territory,  or  the  District  of  Columbia,  or  a  political  subdivision  of  a  State 
or  Territory;  but  this  provision  is  not  intended  to  confer  upon  such  person 
or  corporation  any  financial  gain  or  exemption  or  to  relieve  such  person 
or  corporation  from  the  payment  of  a  tax  as  provided  for  in  this  title  upon 
the  part  or  portion  of  the  said  income  to  which  such  person  or  corporation 
shall  be  entitled  under  such  contract. 

DEDUCTIONS 

SEC.  12.  (a)  In  the  case  of  a  corporation,  joint-stock  com-  Deductions 
pany   or  association,   or  insurance   company,   organized   in   Allowed  to 
the  United  States,  such  net  income  shall  be  ascertained  by  Domestic 
deducting  from  the  gross  amount  of  its  income  received  within  Corpora- 
the  year  from  all  sources —  tions. 

First.  All  the  ordinary  and  necessary  expenses  paid  within  the  year 
in  the  maintenance  and  operation  of  its  business  and  properties,  including 
rentals  or  other  payments  required  to  be  made  as  a  condition  Necessary 
to  the  continued  use  or  possession  of  property  to  which  the  Expenses, 
corporation  has  not  taken  or  is  not  taking  title,  or  in  which  it  has  no  equity. 

Second.  All  losses  actually  sustained  and  charged  off  within  the  year 
and  not  compensated  by  insurance  or  otherwise,  including  •, 
a  reasonable  allowance  for  the  exhaustion,  wear  and  tear 
of  property  arising  out  of  its  use  or  employment  in  the  business  or  trade; 
(a)  in  the  case  of  oil  and  gas  wells  a  reasonable  allowance  for  Deprecia- 
actual  reduction  in  flow  and  production  to  be  ascertained   tion. 
not  by  the  flush  flow,  but  by  the  settled  production  or  regular  flow;  (b)  in 
the  case  of  mines  a  reasonable  allowance  for  depletion  thereof  -^     .  .. 
not  to  exceed  the  market  value  hi  the  mine  of  the  product      e^  e 
thereof  which  has  been  mined  and  sold  during  the  year  for  which  the  return 


234  APPENDIX  A 

and  computation  are  made,  such  reasonable  allowance  to  be  made  in  the 
case  of  both  (a)  and  (b)  under  rules  and  regulations  to  be  prescribed  by  the 
Limitation  Secretary  of  the  Treasury:  Provided,  That  when  the  allow- 
of  Deple-  ance  authorized  in  (a)  and  (b)  shall  equal  the  capital  originally 
tion.  invested,  or  in  case  of  purchase  made  prior  to  March  first, 

nineteen  hundred  and  thirteen,  the  fair  market  value  as  of  that  date,  no 
further  allowance  shall  be  made;  and  (c)  hi  the  case  of  insurance  companies, 
the  net  addition,  if  any,  required  by  law  to  be  made  within  the  year  to  re- 
serve funds  and  the  sums  other  than  dividends  paid  within  the  year  on 
Improve-  policy  and  annuity  contracts:  Provided,  That  no  deduction 
merits.  shall  be  allowed  for  any  amount  paid  out  for  new  buildings, 

permanent  improvements,  or  betterments  made  to  increase  the  value  of 
any  property  or  estate,  and  no  deduction  shall  be  made  for  any  amount  of 
expense  of  restoring  property  or  making  good  the  exhaustion  thereof  for 
which  an  allowance  is  or  has  been  made:  Provided  further,  That  mutual  fire 
Income  of  and  mutual  employers'  liability  and  mutual  workmen's  corn- 
Mutual  pensation  and  mutual  casualty  insurance  companies  requir- 
Companies.  ing  their  members  to  make  premium  deposits  to  provide  for 
losses  and  expenses  shall  not  return  as  income  any  portion  of  the  premium 
deposits  returned  to  their  policyholders,  but  shall  return  as  taxable  income 
all  income  received  by  them  from  all  other  sources  plus  such  portions  of 
the  premium  deposits  as  are  retained  by  the  companies  for  purposes  other 
than  the  payment  of  losses  and  expenses  and  reinsurance  reserves:  Provided 
further,  That  mutual  marine  insurance  companies  shall  include  in  their 
return  of  gross  income  gross  premiums  collected  and  received  by  them  less 
amounts  paid  for  reinsurance,  but  shall  be  entitled  to  include  in  deductions 
from  gross  income  amounts  repaid  to  policyholders  on  account  of  premiums 
previously  paid  by  them  and  interest  paid  upon  such  amounts  between  the 
ascertainment  thereof  and  the  payment  thereof,  and  life  insurance  com- 
panies shall  not  include  as  income  in  any  year  such  portion  of  any  actual 
premium  received  from  any  individual  policyholder  as  shall  have  been 
paid  back  or  credited  to  such  individual  policyholder,  or  treated  as  an  abate- 
ment of  premium  of  such  individual  policyholder,  within  such  year; 

1  Third.  The  amount  of  interest  paid  within  the  year  on  its  indebtedness 
(except  on  indebtedness  incurred  for  the  purchase  of  obligations  or  securi- 


Interest  *nterest  uP°n  which  is  exempt  from  taxation  as  in- 

come under  this  title)  to  an  amount  of  such  indebtedness  not  in 
excess  of  the  sum  of  (a)  the  entire  amount  of  the  paid-up  capital  stock  out- 
standing at  the  close  of  the  year,  or,  if  no  capital  stock,  the  entire  amount 
of  capital  employed  in  the  business  at  the  close  of  the  year,  and  (b)  one-half 
of  its  interest-bearing  indebtedness  then  outstanding:  Provided,  That  for 
Limitation  the  purpose  of  this  title  preferred  capital  stock  shall  not  be 
of  Interest  considered  interest-bearing  indebtedness,  and  interest  or 
Deductible,  dividends  paid  upon  this  stock  shall  not  be  deductible  from 
gross  income:  Provided  further,  That  in  cases  wherein  shares  of  capital  stock 
are  issued  without  par  or  nominal  value,  the  amount  of  paid-up  capital 

1  Amendment. 


AMENDED  INCOME  TAX  LAW  235 

stock,  within  the  meaning  of  this  section,  as  represented  by  such  shares, 
will  be  the  amount  of  cash,  or  its  equivalent,  paid  or  transferred  to  the 
corporation  as  a  consideration  for  such  shares:  Provided  further,  That  in 
the  case  of  indebtedness  wholly  secured  by  property  collateral,  tangible 
or  intangible,  the  subject  of  sale  or  hypothecation  in  the  ordinary  business 
of  such  corporation,  joint-stock  company  or  association  as  a  dealer  only  in 
the  property  constituting  such  collateral,  or  in  loaning  the  funds  thereby 
procured,  the  total  interest  paid  by  such  corporation,  company,  or  associa- 
tion within  the  year  on  any  such  indebtedness  may  be  deducted  as  a  part  of 
its  expenses  of  doing  business,  but  interest  on  such  indebtedness  shall  only 
be  deductible  on  an  amount  of  such  indebtedness  not  in  excess  of  the  actual 
value  of  such  property  collateral:  Provided  fitrther,  That  in  the  case  of  bonds 
or  other  indebtedness,  which  have  been  issued  with  a  guaranty  that  the 
interest  payable  thereon  shall  be  free  from  taxation,  no  deduction  for  the 
payment  of  the  tax  herein  imposed,  or  any  other  tax  paid  pursuant  to  such 
guaranty,  shall  be  allowed;  and  hi  the  case  of  a  bank,  banking  association, 
loan  or  trust  company,  interest  paid  within  the  year  on  deposits  or  on 
moneys  received  for  investment  and  secured  by  interest-bearing  certificates 
of  indebtedness  issued  by  such  bank,  banking  association,  loan  or  trust 
company  shall  be  deducted. 

1  Fourth.  Taxes  paid  within  the  year  imposed  by  the  authority  of  the 
United  States  (except  income  and  excess  profits  taxes),  or  Taxes  De- 
of  its  Territories,  or  possessions,  or  any  foreign  country,  or  ductible. 
by  the  authority  of  any  State,  county,  school  district,  or  Exceptions. 
municipality,  or  other  taxing  subdivision  of  any  State,  not  including  those 
assessed  against  local  benefits. 

(b)  In  the  case  of  a  corporation,  joint-stock  company  or  association, 
or   insurance   company,   organized,   authorized,    or  existing  Net  Tn- 
under  the  laws  of  any  foreign  country,  such  net  income  shall  come  of 
be  ascertained  by  deducting  from  the  gross  amount  of  its  Foreign 
income  received  within  the  year  from  all  sources  within  the  Corpora- 
United  States—  tions. 

First.  All  the  ordinary  and  necessary  expenses  actually  paid  within  the 
year  out  of  earnings  in  the  maintenance  and  operation  of  Deductions 
its  business  and  property  within  the  United  States,  including  Allowed 
rentals  or  other  payments  required  to  be  made  as  a  condition  Foreign 
to  the  continued  use  or  possession  of  property  to  which  the   Corpora- 
corporation  has  not  taken  or  is  not  taking  title,  or  in  which  tions. 
it  has  no  equity. 

Second.  All  losses  actually  sustained  within  the  year  in  business  or  trade 
conducted  by  it  within  the  United  States  and  not  compen- 
sated  by  insurance  or  otherwise,  including  a  reasonable  al- 
lowance for  the  exhaustion,  wear  and  tear  of  property  arising  out  of  its 
use  or  employment  in  the  business  or  trade;  (a)  and  in  the  Deprecia- 
case  (a)  of  oil  and  gas  wells  a  reasonable  allowance  for  actual  tion. 
reduction  in  flow  and  production  to  be  ascertained  not  by  the  flush  flow, 

1  Amendment. 


236  APPENDIX  A 

D  Diction      kut  ky  the  settled  production  or  regular  flow;  (b)  in  the  case 

of  mines  a  reasonable  allowance  for  depletion  thereof  not  to 
exceed  the  market  value  in  the  mine  of  the  product  thereof  which  has  been 
mined  and  sold  during  the  year  for  which  the  return  and  computation  are 
made,  such  reasonable  allowance  to  be  made  in  the  case  of  both  (a)  and 
(b)  under  rules  and  regulations  to  be  prescribed  by  the  Secretary  of  the 
Limitation  Treasury:  Provided,  That  when  the  allowance  authorized 
of  Deple-  in  (a)  and  (b)  shall  equal  the  capital  originally  invested,  or 
tion.  in  case  of  purchase  made  prior  to  March  first,  nineteen  hun- 

dred and  thirteen,  the  fair  market  value  as  of  that  date,  no  further  allow- 
ance shall  be  made;  and  (c)  in  the  case  of  insurance  companies,  the  net  ad- 
dition, if  any,  required  by  law  to  be  made  within  the  year  to  reserve  funds 
and  the  sums  other  than  dividends  paid  within  the  year  on  policy  and  an- 
Improve-  nuity  contracts:  Provided,  That  no  deduction  shall  be  allowed 
ments.  for  any  amount  paid  out  for  new  buildings,  permanent  im- 

provements, or  betterments,  made  to  increase  the  value  of  any  property 
or  estate,  and  no  deduction  shall  be  made  for  any  amount  of  expense  of 
restoring  property  or  making  good  the  exhaustion  thereof  for  which  an 
allowance  is  or  has  been  made:  Provided  further,  That  mutual  fire  and 

mutual  employers'  liability  and  mutual  workmen's  compen- 
Mutual  ^  sation  and  mutual  casualty  insurance  companies  requiring 

their  members  to  make  premium  deposits  to  provide  for  losses 
and  expenses  shall  not  return  as  income  any  portion  of  the  premium  de- 
posits returned  to  their  policyholders,  but  shall  return  as  taxable  income 
all  income  received  by  them  from  all  other  sources  plus  such  portions  of  the 
premium  deposits  as  are  retained  by  the  companies  for  purposes  other  than 
the  payment  of  losses  and  expenses  and  reinsurance  reserves:  Provided 
further,  That  mutual  marine  insurance  companies  shall  include  in  their 
return  of  gross  income  gross  premiums  collected  and  received  by  them  less 
amounts  paid  for  reinsurance,  but  shall  be  entitled  to  include  in  deductions 
from  gross  income  amounts  repaid  to  policyholders  on  account  of  premiums 
previously  paid  by  them,  and  interest  paid  upon  such  amounts  between 
the  ascertainment  thereof  and  the  payment  thereof,  and  life  insurance 
companies  shall  not  include  as  income  in  any  year  such  portion  of  any  actual 
premium  received  from  any  individual  policyholder  as  shall  have  been 
paid  back  or  credited  to  such  individual  policyholder,  or  treated  as  an 
abatement  of  premium  of  such  individual  policyholder,  within  such  year; 

1  Third.  The  amount  of  interest  paid  within  the  year  on  its  indebted- 
ness (except  on  indebtedness  incurred  for  the  purchase  of  obligations  or 
Int  st  securities  the  interest  upon  which  is  exempt  from  taxation 

as  income  under  this  title)  to  an  amount  of  such  indebtedness 
not  in  excess  of  the  proportion  of  the  sum  of  (a)  the  entire  amount  of  the 
paid-up  capital  stock  outstanding  at  the  close  of  the  year,  or,  if  no  capital 
Limitation  stock,  the  entire  amount  of  the  capital  employed  in  the  busi- 
of  Interest  ness  at  the  close  of  the  year,  and  (b)  one-half  of  its  interest- 
Deductible,  bearing  indebtedness  then  outstanding,  which  the  gross  amount 

1  Amendment. 


AMENDED   INCOME   TAX   LAW  237 

of  its  income  for  the  year  from  business  transacted  and  capital  invested 
within  the  United  States  bears  to  the  gross  amount  of  its  income  derived 
from  all  sources  within  and  without  the  United  States:  Provided,  That 
in  the  case  of  bonds  or  other  indebtedness  which  have  been  issued  with 
a  guaranty  that  the  interest  payable  thereon  shall  be  free  from  taxation, 
no  deduction  for  the  payment  of  the  tax  herein  imposed  or  any  other  tax 
paid  pursuant  to. such  guaranty  shall  be  allowed;  and  in  case  of  a  bank, 
banking  association,  loan  or  trust  company,  or  branch  thereof,  interest 
paid  within  the  year  on  deposits  by  or  on  moneys  received  for  investment 
from  either  citizens  or  residents  of  the  United  States  and  secured  by  interest- 
bearing  certificates  of  indebtedness  issued  by  such  bank,  banking  associa- 
tion, loan  or  trust  company,  or  branch  thereof; 

Fourth.  Taxes  paid  within  the  year  imposed  by  the  authority  of  the 
United  States  (except  income  and  excess  profits  taxes),  or  of  Taxes  De- 
its  Territories,  or  possessions,  or  by  the  authority  of  any  ductible. 
State,  county,  school  district,  or  municipality,  or  other  taxing  Excep- 
subdivision  of  any  State,  paid  within  the  United  States,  not  tions. 
including  those  assessed  against  local  benefits. 

(c)  In  the  case  of  assessment  insurance  companies,  whether  domestic 
or  foreign,  the  actual  deposit  of  sums  with  State  or  Terri-  Reserve 
torial  officers,  pursuant  to  law,  as  additions  to  guarantee  Insurance 
or  reserve  funds  shall  be  treated  as  being  payments  required   Corn- 
by  law  to  reserve  funds.  panics. 

RETURNS 

SEC.  13.  (a)  The  tax  shall  be  computed  upon  the  net  income,  as  thus 
ascertained,  received  within  each  preceding  calendar  year  ending  December 
thirty-first:  Provided,  That  any  corporation,  joint-stock  com- 
pany  or  association,  or  insurance  company,  subject  to  this 
tax,  may  designate  the  last  day  of  any  month  in  the  year  as  the  day  of  the 
closing  of  its  fiscal  year  and  shall  be  entitled  to  have  the  tax  Fiscal 
payable  by  it  computed  upon  the  basis  of  the  net  income  as-  Year. 
certained  as  herein  provided  for  the  year  ending  on  the  day  so  designated 
in  the  year  preceding  the  date  of  assessment  instead  of  upon  the  basis  of 
the  net  income  for  the  calendar  year  preceding  the  date  of  assessment;  and 
it  shall  give  notice  of  the  day  it  has  thus  designated  as  the  closing  of  its 
fiscal  year  to  the  collector  of  the  district  in  which  its  principal  business 
office  is  located  at  any  time  not  less  than  thirty  days  prior  to  the  first  day 
of  March  of  the  year  in  which  its  return  would  be  filed  if  made  upon  the 
basis  of  the  calendar  year; 

(b)  Every  corporation,  joint-stock  company  or  association,  or  insurance 
company,  subject  to  the  tax  herein  imposed,  shall,  on  or  before  the  first 
day  of  March,  nineteen  hundred  and  seventeen,  and  the  first  Return 
day  of  March  in  each  year  thereafter,  or,  if  it  has  designated  When  Due. 
a  fiscal  year  for  the  computation  of  its  tax,  then  within  sixty  days  after  the 
close  of  such  fiscal  year  ending  prior  to  December  thirty-first,  nineteen 
hundred  and  sixteen,  and  the  close  of  each  such  fiscal  year  thereafter,  render 


238  APPENDIX  A 

a  true  and  accurate  return  of  its  annual  net  income  in  the  manner  and  form 
to  be  prescribed  by  the  Commissioner  of  Internal  Revenue,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury,  and  containing  such  facts,  data, 
and  information  as  are  appropriate  and  in  the  opinion  of  the  commissioner 
necessary  to  determine  the  correctness  of  the  net  income  returned  and  to 
Sworn  to  cany  out  the  provisions  of  this  title.  The  return  shall  be 
by  Two  sworn  to  by  the  president,  vice  president,  or  other  principal 
Officers  of  officer,  and  by  the  treasurer  or  assistant  treasurer.  The 
Corpora-  return  shall  be  made  to  the  collector  of  the  district  in  which 
tion.  is  located  the  principal  office  of  the  corporation,  company, 

or  association,  where  are  kept  its  books  of  account  and  other  data  from 
which  the  return  is  prepared,  or  in  the  case  of  a  foreign  corporation,  corn- 
Where  to  Panv>  or  association,  to  the  collector  of  the  district  in  which 
File  Re-  is  located  its  principal  place  of  business  in  the  United  States, 
turn.  or  if  it  have  no  principal  place  of  business,  office,  or  agency 

in  the  United  States,  then  to  the  collector  of  internal  revenue  at  Baltimore, 
Maryland.  All  such  returns  shall  as  received  be  transmitted  forthwith  by 
the  collector  to  the  Commissioner  of  Internal  Revenue; 

(c)  In  cases  wherein  receivers,  trustees  in  bankruptcy,  or  assignees  are 
operating  the  property  or  business  of  corporations,  joint-stock  companies 
Receivers,    or  associations,  or  insurance  companies,  subject  to  tax  imposed 
Trustees,      by  this  title,  such  receivers,  trustees,  or  assignees  shall  make 
etc.,  Must     returns  of  net  income  as  and  for  such  corporations,  joint- 
Make  Re-     stock  companies  or  associations,  and  insurance  companies, 
turns.  in  the  same  manner  and  form  as  such  organizations  are  here- 
inbefore required  to  make  returns,  and  any  income  tax  due  on  the  basis  of 
such  returns  made  by  receivers,  trustees,  or  assignees  shall  be  assessed  and 
collected  in  the  same  manner  as  if  assessed  directly  against  the  organiza- 
tions of  whose  businesses  or  properties  they  have  custody  and  control; 

(d)  A  corporation,  joint-stock  company  or  association,  or  insurance  com- 
pany, keeping  accounts  upon  any  basis  other  than  that  of  actual  receipts 
Basis  of         and  disbursements,  unless  such  other  basis  does  not  clearly 
Keeping        reflect  its  income,  may,  subject  to  regulations  made  by  the 
Accounts.      Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  make  its  return  upon  the  basis  upon  which  its 
accounts  are  kept,  in  which  case  the  tax  shall  be  computed  upon  its  income 
as  so  returned; 

1  (e)  All  the  provisions  of  this  title  relating  to  the  tax  authorized  and 
required  to  be  deducted  and  withheld  and  paid  to  the  officer  of  the  United 
Withhold-  States  Government  authorized  to  receive  the  same  from 
ing  Tax  on  the  income  of  nonresident  alien  individuals  from  sources 
Incomes  of  within  the  United  States  shall  be  made  applicable  to  the 
Foreign  tax  imposed  by  subdivision  (a)  of  section  ten  upon  incomes 
Corpora-  derived  from  interest  upon  bonds  and  mortgages  or  deeds  of 
tions.  trust  or  similar  obligations  of  domestic  or  other  resident 

corporations,  joint-stock  companies  or  associations,  and  insurance  com- 

1  Amendment. 


AMENDED  INCOME  TAX  LAW  239 

panics  by  nonresident  alien  firms,  copartnerships,  companies,  corporations, 
joint-stock  companies  or  associations,  and  insurance  companies,  not  en- 
gaged in  business  or  trade  within  the  United  States  and  not  having  any 
office  or  place  of  business  therein. 

(f)  Likewise,  all  the  provisions  of  this  title  relating  to  the  tax  authorized 
and  required  to  be  deducted  and  withheld  and  paid  to  the  officer  of  the 
United  States  Government  authorized  to  receive  the  same   jyv'j  n(ig 
from  the  income  of  nonresident  alien  individuals  from  sources 
within  the  United  States  shall  be  made  applicable  to  income  derived  from 
dividends  upon  the  capital  stock  or  from  the  net  earnings  of  domestic  or 
other  resident  corporations,  joint-stock  companies  or  associa-  Nonres- 
tions,  and  insurance  companies  by  nonresident  alien  companies,   ident  Or- 
corporations,  joint-stock  companies  or  associations,  and  insur-  ganiza- 
ance  companies  not  engaged  in  business  or  trade  within  the  tions. 
United  States  and  not  having  any  office  or  place  of  business  therein. 

ASSESSMENT  AND  ADMINISTRATION 

SEC.  14.  (a)  All  assessments  shall  be  made  and  the  several  corporations, 
joint-stock  companies  or  associations,  and  insurance  companies  shall  be 
notified  of  the  amount  for  which  they  are  respectively  liable  Assess- 
on  or  before  the  first  day  of  June  of  each  successive  year,  ments. 
and  said  assessment  shall  be  paid  on  or  before  the  fifteenth  day  of  June; 
Provided,  That  every  corporation,  joint-stock  company  or  Payment 
association,  and  insurance  company,  computing  taxes  upon   of  Tax 
the  income  of  the  fiscal  year  which  it  may  designate  in  the  When  Due. 
manner  hereinbefore  provided,  shall  pay  the  taxes  due  under  its  assessment 
within  one  hundred  and  five  days  after  the  date  upon  which  it  is  required 
to  file  its  list  or  return  of  income  for  assessment;  except  in  cases  of  refusal 
or  neglect  to  make  such  return,  and  in  cases  of  erroneous,  false,  or  fraudulent 
returns,  in  which  cases  the  Commissioner  of  Internal  Revenue  shall,  upon 
the  discovery  thereof,  at  any  time  within  three  years  after  said  return  is 
due,  make  a  return  upon  information  obtained  as  provided  for  in  this  title 
or  by  existing  law;  and  the  assessment  made  by  the  Commissioner  of  In- 
ternal Revenue  thereon  shall  be  paid  by  such  corporation,  joint-stock  com- 
pany or  association,  or  insurance  company  immediately  upon  notification 
of  the  amount  of  such  assessment;  and  to  any  sum  or  sums  due  and  unpaid 
after  the  fifteenth  day  of  June  in  any  year,  or  after  one  hundred  and  five 
days  from  the  date  on  which  the  return  of  income  is  required  Penalty 
to  be  made  by  the  taxpayer,  and  after  ten  days'  notice  and  Delayed 
demand  thereof  by  the  collector,  there  shall  be  added  the  Payment, 
sum  of  five  per  centum  on  the  amount  of  tax  unpaid  and  interest  at  the  rate 
of  one  per  centum  per  month  upon  said  tax  from  the  time  the  same  becomes 
due;  Provided,  That  upon  the  examination  of  any  return  of  income  made 
pursuant  to  this  title,  the  Act  of  August  fifth,  nineteen  hundred  and  nine, 
entitled,  "An  Act  to  provide  revenue,  equalize  duties  and  encourage  the 
industries  of  the  United  States,  and  for  other  purposes,"  and  the  Act  of 
October  third,  nineteen  hundred  and  thirteen,  entitled,  "An  Act  to  reduce 


240  APPENDIX  A 

tariff  duties  and  to  provide  revenue  for  the  Government,  and  for  other 
purposes,"  if  it  shall  appear  that  amounts  of  tax  have  been  paid  in  excess 
of  those  properly  due,  the  taxpayer  shall  be  permitted  to  present  a  claim 
for  refund  thereof  notwithstanding  the  provisions  of  section  thirty-two 
hundred  and  twenty-eight  of  the  Revised  Statutes; 

(b)  When  the  assessment  shall  be  made,  as  provided  in  this  title,  the 
returns,  together  with  any  corrections  thereof  which  may  have  been  made 
Returns         by  the  commissioner,  shall  be  filed  in  the  office  of  the  Corn- 
Constitute     missioner  of  Internal  Revenue  and  shall  constitute  public 
Public  records  and  be  open  to  inspection  as  such;  Provided,  That 
Records.        anv  and  all  such  returns  shall  be  open  to  inspection  only 
upon  the  order  of  the  President,  under  rules  and  regulations  to  be  prescribed 
Conditions    by  the  Secretary  of  the  Treasury  and  approved  by  the  Presi- 
of    Inspec-  dent;  Provided  further,  That  the  proper  officers  of  any  State 
tion.  imposing  a  general  income  tax  may,  upon  the  request  of  the 
governor  thereof,  have  access  to  said  returns  or  to  an  abstract  thereof,  show- 
ing the  name  and  income  of  each  such  corporation,  joint-stock  company 
or  association,  or  insurance  company,  at  such  times  and  in  such  manner  as 
the  Secretary  of  the  Treasury  may  prescribe; 

(c)  If  any  of  the  corporations,  joint-stock  companies  or  associations,  or 
insurance  companies  aforesaid  shall  refuse  or  neglect  to  make  a  return  at 
Penalty          ^e  ^UTie  or  times  hereinbefore  specified  in  each  year,  or  shall 
Refusal  to     render  a  false  or  fraudulent  return,  such  corporation,  joint- 
Make  Re-     stock  company  or  association,  or  insurance  company  shall 
turn  and        be  liable  to  a  penalty  of  not  exceeding  $10,000;  Provided, 
Making         That  the  Commissioner  of  Internal  Revenue  shall  have  au- 
False  thority,   in  the  case  of  either  corporations  or  individuals, 
Return.         to  grant  a  reasonable  extension  of  time  in  meritorious  cases, 
as  he  may  deem  proper. 

(d)  That  section  thirty-two  hundred  and  twenty-five  of  the  Revised 
Statutes  of  the  United  States  be,  and  the  same  is  hereby,  amended  so  as 
to  read  as  follows: 

"SEC.  3225.  When  a  second  assessment  is  made  in  case  of  any  list,  state- 
ment, or  return,  which  in  the  opinion  of  the  collector  or  deputy  collector 
Second  was  false  or  fraudulent,  or  contained  any  understatement 
Assess-  or  undervaluation,  no  tax  collected  under  such  assessment 
ment.  shall  be  recovered  by  any  suit  unless  it  is  proved  that  the  said 

list,  statement,  or  return  was  not  false  nor  fraudulent  and  did  not  contain 
any  understatement  or  undervaluation;  but  this  section  shall  not  apply  to 
statements  or  returns  made  or  to  be  made  in  good  faith  under  the  laws  of  the 
United  States,  regarding  annual  depreciation  of  oil  or  gas  wells  and  mines." 

PART  III. — GENERAL  ADMINISTRATIVE  PROVISIONS 

"  State  "  SEC.  15.  That  the  word  "State"  or  "United  States"  when 

"  United  used  in  this  title  shall  be  construed  to  include  any  Territory, 

States  "  the  District  of  Columbia,  Porto  Rico,  and  the  Philippine 

Defined.  Islands,  when  such  construction  is  necessary  to  carry  out  its 
provisions. 


AMENDED   INCOME  TAX  LAW  24! 

SEC.  16.  That  sections  thirty-one  hundred  and  sixty-seven,  thirty-one 
hundred  and  seventy-two,  thirty-one  hundred  and  seventy-three,  and 
thirty-one  hundred  and  seventy-six  of  the  Revised  Statutes  of  the  United 
States  as  amended  are  hereby  amended  so  as  to  read  as  follows: 

"SEC.  3167.  It  shall  be  unlawful  for  any  collector,  deputy  collector,  agent, 
clerk,  or  other  officer  or  employee  of  the  United  States  to  divulge  or  to 
make  known  in  any  manner  whatever  not  provided  by  law   Disclosing 
to  any  person  the  operations,  style  of  work,  or  apparatus  of  Informa- 
any  manufacturer  or  producer  visited  by  him  in  the  discharge   tipn  Pro- 
of his  official  duties,  or  the  amount  or  source  of  income,  profits,  hibited. 
losses,  expenditures,  or  any  particular  thereof,  set  forth  or  disclosed  in 
any  income  return,  or  to  permit  any  income  return  or  copy  thereof  or  any 
book  containing  any  abstract  or  particulars  thereof  to  be  seen  or  examined 
by  any  person  except  as  provided  by  law;  and  it  shall  be  unlawful  for  any 
person  to  print  or  publish  in  any  manner  whatever  not  provided  by  law 
any  income  return  or  any  part  thereof  or  source  of  income,  profits,  losses, 
or  expenditures  appearing  in  any  income  return;  and  any  offense  against 
the  foregoing  provision  shall  be  a  misdemeanor  and  be  punished  by  a  fine 
not  exceeding  $1,000  or  by  imprisonment  not  exceeding  one  year,  or  both, 
at  the  discretion  of  the  court;  and  if  the  offender  be  an  officer  or  employee 
of  the  United  States  he  shall  be  dismissed  from  office  or  discharged  from 
employment. 

"SEC.  3172.  Every  collector  shall,  from  time  to  time,  cause  his  deputies 
to  proceed  through  every  part  of  his  district  and  inquire  after  and  concern- 
ing all  persons  therein  who  are  liable  to  pay  any  internal-  Collector's 
revenue  tax,  and  all  persons  owning  or  having  the  care  and  Duty. 
management  of  any  objects  liable  to  pay  any  tax,  and  to  make  a  list  of 
such  persons  and  enumerate  said  objects. 

"SEC.  3173.  It  shall  be  the  duty  of  any  person,  partnership,  firm,  associa- 
tion, or  corporation,  made  liable  to  any  duty,  special  tax,  or  other  tax  im- 
posed by  law,  when  not  otherwise  provided  for,  (i)  in  case  Provisions 
of  a  special  tax,  on  or  before  the  thirty-first  day  of  July  in  of  Admin- 
each  year,  (2)  in  case  of  income  tax  on  or  before  the  first  day  istration. 
of  March  in  each  year,  or  on  or  before  the  last  day  of  the  sixty-day  period 
next  following  the  closing  date  of  the  fiscal  year  for  which  it  makes  a  return 
of  its  income,  and  (3)  in  other  cases  before  the  day  on  which  the  taxes 
accrue,  to  make  a  list  or  return,  verified  by  oath,  to  the  collector  or  a  deputy 
collector  of  the  district  where  located,  of  the  articles  or  objects,  including 
the  amount  of  annual  income  charged  with  a  duty  or  tax,  the  quantity  of 
goods,  wares,  and  merchandise,  made  or  sold  and  charged  with  a  tax,  the 
several  rates  and  aggregate  amount,  according  to  the  forms  and  regulations 
to  be  prescribed  by  the  Commissioner  of  Internal  Revenue,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury,  for  which  such  person,  partnership, 
firm,  association,  or  corporation  is  liable:  Provided,  That  if  any  person 
liable  to  pay  any  duty  or  tax,  or  owning,  possessing,  or  having  the  care  or 
management  of  property,  goods,  wares,  and  merchandise,  article  or  objects 
liable  to  pay  any  duty,  tax,  or  license,  shall  fail  to  make  and  exhibit  a  list 
or  return  required  by  law,  but  shall  consent  to  disclose  the  particulars  of 


242  APPENDIX  A 

any  and  all  the  property,  goods,  wares,  and  merchandise,  articles,  and  ob- 
jects liable  to  pay  any  duty  or  tax,  or  any  business  or  occupation  liable  to 
pay  any  tax  as  aforesaid,  then,  and  in  that  case,  it  shall  be  the  duty  of  the 
Returns,  collector  or  deputy  collector  to  make  such  list  or  return, 
Collectors,  which,  being  distinctly  read,  consented  to,  and  signed  and 
verified  by  oath  by  the  person  so  owning,  possessing,  or  having  the  care  and 
management  as  aforesaid,  may  be  received  as  the  list  of  such  person:  Pro- 
vided further,  That  in  case  no  annual  list  or  return  has  been  rendered  by 
such  person  to  the  collector  or  deputy  collector  as  required  by  law,  and  the 
person  shall  be  absent  from  his  or  her  residence  or  place  of  business  at  the 
time  the  collector  or  a  deputy  collector  shall  call  for  the  annual  list  or  re- 
turn, it  shall  be  the  duty  of  such  collector  or  deputy  collector  to  leave  at 
such  place  of  residence  or  business,  with  some  one  of  suitable  age  and  dis- 
cretion, if  such  be  present,  otherwise  to  deposit  in  the  nearest  post  office,  a 
note  or  memorandum  addressed  to  such  person,  requiring  him  or  her  to 
render  to  such  collector  or  deputy  collector  the  list  or  return  required  by 
law  within  ten  days  from  the  date  of  such  note  or  memorandum,  verified  by 
oath.  And  if  any  person,  on  being  notified  or  required  as  aforesaid,  shall 
refuse  or  neglect  to  render  such  list  or  return  within  the  time  required  as 
aforesaid,  or  whenever  any  person  who  is  required  to  deliver  a  monthly  or 
other  return  of  objects  subject  to  tax  fails  to  do  so  at  the  time  required,  or 
delivers  any  return  which,  in  the  opinion  of  the  collector,  is  erroneous,  false, 
or  fraudulent,  or  contains  any  undervaluation  or  understatement,  or  refuses 
to  allow  any  regularly  authorized  Government  officer  to  examine  the  books 
of  such  person,  firm,  or  corporation,  it  shall  be  lawful  for  the  collector  to 
summon  such  person,  or  any  other  person  having  possession,  custody,  or 
care  of  books  of  account  containing  entries  relating  to  the  business  of  such 
person,  or  any  other  person  he  may  deem  proper,  to  appear  before  him  and 
produce  such  books  at  a  tune  and  place  named  in  the  summons,  and  to  give 
testimony  or  answer  interrogatories,  under  oath,  respecting  any  objects  or 
income  liable  to  tax  or  the  returns  thereof.  The  collector  may  summon 
any  person  residing  or  found  within  the  State  or  Territory  in  which  his 
district  lies;  and  when  the  person  intended  to  be  summoned  does  not  reside 
and  cannot  be  found  within  such  State  or  Territory,  he  may  enter  any  collec- 
tion district  where  such  person  may  be  found  and  there  make  the  examina- 
tion herein  authorized.  And  to  this  end  he  may  there  exercise  all  the  author- 
ity which  he  might  lawfully  exercise  in  the  district  for  which  he  was  commis- 
sioned: Provided,  That  "person,"  as  used  in  this  section,  shall  be  construed 
to  include  any  corporation,  joint-stock  company  or  association,  or  insurance 
company  when  such  construction  is  necessary  to  carry  out  its  provisions. 

SEC.  3176.  If  any  person,  corporation,  company,  or  association  fails  to 
make  and  file  a  return  or  list  at  the  time  prescribed  by  law,  or  makes,  will- 
When  fully  or  otherwise,  a  false  or  fraudulent  return  or  list,  the 
Collector  collector  or  deputy  collector  shall  make  the  return  or  list 
MayPre-  from  his  own  knowledge  and  from  such  information  as  he 
pare  Re-  can  obtain  through  testimony  or  otherwise.  Any  return  or 
turn,  list  so  made  and  subscribed  by  a  collector  or  deputy  collector 
shall  be  prima  facie  good  and  sufficient  for  all  legal  purposes. 


AMENDED  INCOME  TAX  LAW  243 

If  the  failure  to  file  a  return  or  list  is  due  to  sickness  or  absence  the  col- 
lector may  allow  such  further  time,  not  exceeding  thirty  days,  Extension 
for  making  and  filing  the  return  or  list  as  he  deems  proper.        of  Time. 

"The  Commissioner  of  Internal  Revenue  shall  assess  all  taxes,  other 
than  stamp  taxes,  as  to  which  returns  or  lists  are  so  made  by  a  collector 
or  deputy  collector.    In  case  of  any  failure  to  make  and  file  Penalties 
a  return  or  list  within  the  time  prescribed  by  law  or  by  the  for  Failure 
collector,  the  Commissioner  of  Internal  Revenue  shall  add  to  File 
to  the  tax  fifty  per  centum  of  its  amount  except  that,  when  Returns, 
a  return  is  voluntarily  and  without  notice  from  the  collector  filed  after  such 
time  and  it  is  shown  that  the  failure  to  file  it  was  due  to  a  reasonable  cause 
and  not  to  willful  neglect,  no  such  addition  shall  be  made  to  the  tax.    In 
case  a  false  or  fraudulent  return  or  list  is  willfully  made,  the  Commissioner 
of  Internal  Revenue  shall  add  to  the  tax  one  hundred  per  False  Re* 
centum  of  its  amount.  turn. 

"The  amount  so  added  to  any  tax  shall  be  collected  at  the  same  time 
and  in  the  same  manner  and  as  part  of  the  tax  unless  the  tax  has  been  paid 
before  the  discovery  of  the  neglect,  falsity,  or  fraud,  in  which  case  the 
amount  so  added  shall  be  collected  in  the  same  manner  as  the  tax." 

SEC.  17.  That  it  shall  be  the  duty  of  every  collector  of  internal  revenue, 
to  whom  any  payment  of  any  taxes  is  made  under  the  provisions  of  this 
title,  to  give  to  the  person  making  such  payment  a  full  written  Receipt  for 
or  printed  receipt,  expressing  the  amount  paid  and  the  par-  Payment 
ticular  account  for  which  such  payment  was  made;  and  when-  of  Tax. 
ever  such  payment  is  made  such  collector  shall,  if  required,  give  a  separate 
receipt  for  each  tax  paid  by  any  debtor,  on  account  of  payments  made  to 
or  to  be  made  by  him  to  separate  creditors  in  such  form  that  such  debtor  can 
conveniently  produce  the  same  separately  to  his  several  creditors  in  satis- 
faction of  their  respective  demands  to  the  amounts  specified  in  such  receipts; 
and  such  receipts  shall  be  sufficient  evidence  in  favor  of  such  debtor  to 
justify  him  in  withholding  the  amount  therein  expressed  from  his  next  pay- 
ment to  his  creditor;  but  such  creditor  may,  upon  giving  to  his  debtor  a 
full  written  receipt,  acknowledging  the  payment  to  him  of  whatever  sum 
may  be  actually  paid,  and  accepting  the  amount  of  tax  paid  as  aforesaid 
(specifying  the  same)  as  a  further  satisfaction  of  the  debt  to  that  amount, 
require  the  surrender  to  him  of  such  collector's  receipt. 

1  SEC.  1 8.  That  any  person,  corporation,  partnership,  association,  or  in- 
surance company,  liable  to  pay  the  tax,  to  make  a  return  or  to  supply  in- 
formation required  under  this  title,  who  refuses  or  neglects  Penalty  for 
to  pay  such  tax,  to  make  such  return  or  to  supply  such  in-  Refusal   or 
formation  at  the  time  or  times  herein  specified  in  each  year,  Neglect  to 
shall  be  liable,  except  as  otherwise  specially  provided  in  this   Make  Re- 
title,  to  a  penalty  of  not  less  than  $20  nor  more  than  $1,000.  turn. 
Any  individual  or  any  officer  of  any  corporation,  partnership,  association, 
or  insurance  company,  required  by  law  to  make,  render,  sign,  or  verify  any 
return  or  to  supply  any  information,  who  makes  any  false  or  fraudulent 

1  Amendment. 


244  APPENDIX  A 

return  or  statement  with  intent  to  defeat  or  evade  the  assessment  required 
by  this  title  to  be  made,  shall  be  guilty  of  a  misdemeanor,  and  shall  be  fined 
not  exceeding  $2,000  or  be  imprisoned  not  exceeding  one  year,  or  both,  in 
the  discretion  of  the  court,  with  the  costs  of  prosecution:  Provided,  That 
where  any  tax  heretofore  due  and  payable  has  been  duly  paid  by  the  tax- 
payer, it  shall  not  be  re-collected  from  any  withholding  agent  required  to 
retain  it  at  its  source,  nor  shall  any  penalty  be  imposed  or  collected  in  such 
cases  from  the  taxpayer,  or  such  withholding  agent  whose  duty  it  was  to 
retain  it,  for  failure  to  return  or  pay  the  same,  unless  such  failure  was  fraudu- 
lent and  for  the  purpose  of  evading  payment." 

SEC.  19.  The  collector  or  deputy  collector  shall  require  every  return  to 
be  verified  by  the  oath  of  the  party  rendering  it.  If  the  collector  or  deputy 
Returns  collector  have  reason  to  believe  that  the  amount  of  any  income 
Verified  by  returned  is  understated,  he  shall  give  due  notice  to  the  person 
Oath.  making  the  return  to  show  cause  why  the  amount  of  the 

return  should  not  be  increased,  and  upon  proof  of  the  amount  understated 
may  increase  the  same  accordingly.  Such  person  may  furnish  sworn  testi- 
mony to  prove  any  relevant  facts,  and,  if  dissatisfied  with  the  decision  of 
Right  of  the  collector,  may  appeal  to  the  Commissioner  of  Internal 
Appeal.  Revenue  for  his  decision  under  such  rules  of  procedure  as 
may  be  prescribed  by  regulation. 

SEC.  20.  That  jurisdiction  is  hereby  conferred  upon  the  district  courts 
Jurisdic-  °f  the  United  States  for  the  district  within  which  any  person 
tion  of  Dis-  summoned  under  this  title  to  appear  to  testify  or  to  produce 
trict  Court,  books  shall  reside,  to  compel  such  attendance,  production 
of  books,  and  testimony  by  appropriate  process. 

SEC.  21.  That  the  preparation  and  publication  of  statistics  reasonably 
available  with  respect  to  the  operation  of  the  income  tax  law  and  contain- 
Stat'st'c  *n^  classifications  of  taxpayers  and  of  income,  the  amounts 
allowed  as  deductions  and  exemptions,  and  any  other  facts 
deemed  pertinent  and  valuable,  shall  be  made  annually  by  the  Commis- 
sioner of  Internal  Revenue  with  the  approval  of  the  Secretary  of  the  Treas- 
ury. 

SEC.  22.  That  all  administrative,  special,  and  general  provisions  of  law, 
including  the  laws  in  relaticn  to  the  assessment,  remission,  collection,  and 
refund  of  internal-revenue  taxes  not  heretofore  specifically  repealed  and 
not  inconsistent  with  the  provisions  of  this  title,  are  hereby  extended  and 
made  applicable  to  all  the  provisions  of  this  title  and  to  the  tax  herein  im- 
posed. 

SEC.  23.  That  the  provisions  of  this  title  shall  extend  to  Porto  Rico  and 
the  Philippine  Islands;  Provided,  That  the  administration  of  the  law  and 
Porto  Rico,  the  collection  of  the  taxes  imposed  in  Porto  Rico  and  the 
Philippine  Philippine  Islands  shall  be  by  the  appropriate  internal-revenue 
Islands.  officers  of  those  governments,  and  all  revenues  collected  in 
Porto  Rico  and  the  Philippine  Islands  thereunder  shall  accrue  intact  to 
the  general  Governments  thereof,  respectively:  Provided  further.  That  the 
jurisdiction  in  this  title  conferred  upon  the  district  courts  of  the  United 
States  shall,  so  far  as  the  Philippine  Islands  are  concerned,  be  vested  in  the 


AMENDED  INCOME  TAX  LAW  245 

courts  of  the  first  instance  of  said  islands;  And  provided  further,  That  nothing 
in  this  title  shall  be  held  to  exclude  from  the  computation  of  the  net  income 
the  compensation  paid  any  official  by  the  governments  of  the  District  of 
Columbia,  Porto  Rico,  and  the  Philippine  Islands,  or  the  political  sub- 
divisions thereof. 

SEC.  24.  That  Section  II  of  the  Act  approved  October  third,  nineteen 
hundred  and  thirteen,  entitled  "An  Act  to  reduce  tariff  duties  and  to  pro- 
vide revenue  for  the  Government,  and  for  other  purposes,"   Repeal  of 
is  hereby  repealed,  except  as  herein  otherwise  provided,  and  Income 
except  that  it  shall  remain  in  force  for  the  assessment  and  Tax  Act  of 
collection  of  all  taxes  which  have  accrued  thereunder,  and  for  1913. 
the  imposition  and  collection  of  all  penalties  or  forfeitures  which  have  ac- 
crued or  may  accrue  in  relation  to  any  of  such  taxes,  and  except  that  the 
unexpended  balance  of  any  appropriation  heretofore  made  and  now  avail- 
able for  the  adminitsration  of  such  section  or  any  provision  thereof  shall  be 
available  for  the  administration  of  this  title  or  the  corresponding  provision 
thereof. 

SEC.  25.  That  income  on  which  has  been  assessed  the  tax  imposed  by 
Section  II  of  the  Act  entitled  "An  Act  to  reduce  tariff  duties  and  to  provide 
revenue  for  the  Government,  and  for  other  purposes,"  approved  October 
third,  nineteen  hundred  and  thirteen,  shall  not  be  considered  as  income 
within  the  meaning  of  this  title;  Provided,  That  this  section  shall  not  conflict 
with  that  portion  of  section  ten,  of  this  title,  under  which  a  taxpayer  has 
fixed  its  own  fiscal  year. 

1  SEC.  26.  Every   corporation,  joint-stock  company  or  association,  or 
insurance  company  subject  to  the  tax  herein  imposed,  when  required  by 
the  Commissioner  of  Internal  Revenue,  shall  render  a  cor-  Returns  of 
rect  return,  duly  verified  under  oath,  of  its  payments  of  divi-  Dividends 
dends,  whether  made  in  cash  or  its  equivalent  or  in  stock,   by    Corpo- 
including  the  names  and  addresses  of  stockholders  and  the  rations. 
number  of  shares  owned  by  each,  and  the  tax  years  and  the  applicable 
amounts  in  which  such  dividends  were  earned,  in  such  form  and  manner 
as  may  be  prescribed  by  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury. 

1  SEC.  27.  That  every  person,  corporation,  partnership,  or  association, 
doing  business  as  a  broker  on  any  exchange  or  board  of  trade  or  other  similar 
place  of  business  shall,  when  required  by  the  Commissioner  Returns  by 
of  Internal  Revenue,  render  a  correct  return  duly  verified  Brokers, 
under  oath,  under  such  rules  and  regulations  as  the  Commissioner  of  In- 
ternal Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury,  may 
prescribe,  showing  the  names  of  customers  for  whom  such  person,  corpora- 
tion, partnership,  or  association  has  transacted  any  business,  with  such 
details  as  to  the  profits,  losses,  or  other  information  which  the  commissioner 
may  require,  as  to  each  of  such  customers,  as  will  enable  the  Commissioner 
of  Internal  Revenue  to  determine  whether  all  income  tax  due  on  profits  or 
gains  of  such  customers  has  been  paid. 

1  Amendment. 


246  APPENDIX  A 

1  SEC.  28.  That  all  persons,  corporations,  partnerships,  associations,  and 
insurance  companies,  in  whatever  capacity  acting,  including  lessees  or  mort- 
Returns.  gagors  of  real  or  personal  property,  trustees  acting  in  any 
"Informa-  trust  capacity,  executors,  administrators,  receivers,  con- 
tion  at  servators,  and  employers,  making  payment  to  another  person, 

Source."  corporation,  partnership,  association,  or  insurance  company, 
of  interest,  rent,  salaries,  wages,  premiums,  annuities,  compensation,  re- 
muneration, emoluments,  or  other  fixed  or  determinable  gains,  profits,  and 
income  (other  than  payments  described  in  sections  twenty-six  and  twenty- 
seven),  of  $800  or  more  in  any  taxable  year,  or,  in  the  case  of  such  pay- 
ments made  by  the  United  States,  the  officers  or  employees  of  the  United 
States  having  information  as  to  such  payments  and  required  to  make  re- 
turns in  regard  thereto  by  the  regulations  hereinafter  provided  for,  are 
hereby  authorized  and  required  to  render  a  true  and  accurate  return  to  the 
Commissioner  of  Internal  Revenue,  under  such  rules  and  regulations  and 
in  such  form  and  manner  as  may  be  prescribed  by  him,  with  the  approval 
of  the  Secretary  of  the  Treasury,  setting  forth  the  amount  of  such  gains, 
profits,  and  income,  and  the  name  and  address  of  the  recipient  of  such  pay- 
Returns,  ment:  Provided,  That  such  returns  shall  be  required,  regard- 
Interest  on  less  of  amounts,  in  the  case  of  payments  of  interest  upon 
Bonds.  bonds  and  mortgages  or  deeds  of  trust  or  other  similar  obliga- 

tions of  corporations,  joint-stock  companies,  associations,  and  insurance 
companies,  and  in  the  case  of  collections  of  items  (not  payable  in  the  United 
States)  of  interest  upon  the  bonds  of  foreign  countries  and  interest  from  the 
bonds  and  dividends  from  the  stock  of  foreign  corporations  by  persons, 
corporations,  partnerships,  or  associations,  undertaking  as  a  matter  of 
business  or  for  profit  the  collection  of  foreign  payments  of  such  interest  or 
dividends  by  means  of  coupons,  checks,  or  bills  of  exchange. 

When  necessary  to  make  effective  the  provisions  of  this  section  the 
name  and  address  of  the  recipient  of  income  shall  be  furnished  upon  de- 
mand of  the  person,  corporation,  partnership,  association,  or  insurance 
company  paying  the  income. 

The  provisions  of  this  section  shall  apply  to  the  calendar  year  nineteen 
hundred  and  seventeen  and  each  calendar  year  thereafter,  but  shall  not 
apply  to  the  payment  of  interest  on  obligations  of  the  United  States. 
Excess  ^EC>  29'  That  in   assessing  income   tax   the  net  income 

Profits  Tax.  embraced  in  the  return  shall  also  be  credited  with  the  amount 
Assess-  of  any  excess  profits  tax  imposed  by  Act  of  Congress  and 
mentCred-  assessed  for  the  same  calendar  or  fiscal  year  upon  the  tax- 
itable  in  payer,  and,  in  the  case  of  a  member  of  a  partnership,  with 
Income  his  proportionate  share  of  such  excess  profits  tax  imposed 
Tax  Re-  upon  the  partnership. 

1  SEC.  30.  That  nothing  in  section  II  of  the  Act  approved 
October  third,  nineteen  hundred  and  thirteen,  entitled  "An  Act  to  reduce 
Tax  not  tariff  duties  and  to  provide  revenue  for  the  Government, 
Applicable  and  for  other  purposes,"  or  in  this  title,  shall  be  construed  as 

1  Amendment. 


AMENDED   INCOME   TAX   LAW  247 

taxing  the  income  of  foreign  governments  received  from  in-  to  Income 
vestments  in  the  United  States  in  stocks,  bonds,  or  other  of  Foreign 
domestic   securities,   owned   by   such   foreign   governments,   Govern- 
or from  interest  on  deposits  in  banks  in  the  United  States  of  ments- 
moneys  belonging  to  foreign  governments. 

^EC.  31.  (a)  That  the  term  "dividends"  as  used  in  this  title  shall  be 
held  to  mean  any  distribution  made  or  ordered  to  be  made  by  a  corporation, 
joint-stock  company,  association,  or  insurance  company,  out   "  Divi- 
of  its  earnings  or  profits  accrued  since  March  first,  nineteen   dends  " 
hundred  and  thirteen,  and  payable  to  its  shareholders,  whether  Defined. 
in  cash  or  in  stock  of  the  corporation,  joint-stock  company,  association,  or 
insurance  company,  which  stock  dividend  shall  be  considered  income,  to 
the  amount  of  the  earnings  or  profits  so  distributed. 

(b)  Any  distribution  made  to  the  shareholders  or  members  of  a  cor- 
poration, joint-stock  company,  or  association,  or  insurance  company,  in 
the  year  nineteen  hundred  and  seventeen,  or  subsequent  tax  Dividends 
years,  shall  be  deemed  to  have  been  made  from  the  most  Deemed  to 
recently  accumulated  undivided  profits  or  surplus,  and  shall  have    been 
constitute  a  part  of  the  annual  income  of  the  distributee  for  Paid  out  of 
the  year  in  which  received,  and  shall  be  taxed  to  the  distrib-  most  re- 
utee  at  the  rates  prescribed  by  law  for  the  years  in  which  cently 
such  profits  or  surplus  were  accumulated  by  the  corporation,   5arJJf C 
joint-stock    company,    association,    or    insurance    company,      r< 
but  nothing  herein  shall  be  construed  as  taxing  any  earnings  or  profits  ac- 
crued prior  to  March  first,  nineteen  hundred  and  thirteen,  but  such  earn- 
ings or  profits  may  be  distributed  in  stock  dividends  or  otherwise,  exempt 
from  the  tax,  after  the  distribution  of  earnings  and  profits  accrued  since 
March  first,  nineteen  hundred  and  thirteen,  has  been  made.     This  sub- 
division shall  not  apply  to  any  distribution  made  prior  to  August  sixth, 
nineteen  hundred  and  seventeen,  out  of  earnings  or  profits  accrued  prior 
to  March  first,  nineteen  hundred  and  thirteen. 

1  SEC.  32.  That  premiums  paid  on  life  insurance  polices  pfgjjjjmug 
covering  the  lives  of  officers,  employees,  or  those  financially  nfe  insur. 
interested  in  any  trade  or  business  conducted  by  an  indi-  ance  Pol- 
vidual,    partnership,    corporation,    joint-stock    company    or  iciesin 
association,  or  insurance  company,  shall  not  be  deducted  Favor  of 
in  computing  the  net  income  of  such  individual,  corpora-   Corpora- 
tion, joint-stock  company  or  association,  or  insurance  com-  tionsand 
pany,  or  in  computing  the  profits  of  such  partnership  for  the  Partner- 
purposes  of  subdivision  (e)  of  section  nine. 

XSEC.  1 21 2.  That  any  amount  heretofore  withheld  by  any  withholding 
agent  as  required  by  Title  I  of  such  Act  of  September  eighth,  nineteen 
hundred  and  sixteen,  on  account  of  the  tax  imposed  upon   Releasing 
the  income  of  any  individual,  a  citizen  or  resident  of  the  Taxes  with- 
United  States,  for  the  calendar  year  nineteen  hundred  and  held, 
seventeen,  except  in  the  cases  covered  by  subdivision  (c)  of  section  nine 

1  Amendment. 


248  APPENDIX  A 

of  such  Act,  as  amended  by  this  Act,  shall  be  released  and  paid  over  to  such 
individual,  and  the  entire  tax  upon  the  income  of  such  individual  for  such 
year  shall  be  assessed  and  collected  in  the  manner  prescribed  by  such  Act 
as  amended  by  this  Act. 

Income  Tax  Law,  approved  September  8,  1916. 

Amendments  approved,  March  3,  1917,  and  October  3,  1917. 


APPENDIX  B 

WAR  REVENUE  LAW 

ENACTED  OCTOBER  3,  1917 

TITLE  I.— WAR  INCOME  TAX 

SECTION  i.  That  in  addition  to  the  normal  tax  imposed  by  subdivision 

(a)  of  section  one  of  the  Act  entitled  "An  Act  to  increase  the  Individ- 
revenue,  and  for  other  purposes,"  approved  September  eighth,   uals. 
nineteen  hundred  and  sixteen,  there  shall  be  levied,  assessed,  collected, 
and  paid  a  like  normal  tax  of  two  per  centum  upon  the  income  of  every 
individual,  a  citizen  or  resident  of  the  United  States,  received  Normal 

in  the  calendar  year  nineteen  hundred  and  seventeen  and  Tax. 
every  calendar  year  thereafter. 

SEC.  2.  That  in  addition  to  the  additional  tax  imposed  by  subdivision 

(b)  of  section  one  of  such  Act  of  September  eighth,  nineteen  hundred  and 
sixteen,  there  shall  be  levied,  assessed,  collected,  and  paid  Additional 
a  like  additional  tax  upon  the  income  of  every  individual  Tax. 
received  in  the  calendar  year  nineteen  hundred  and  seventeen  and  every 
calendar  year  thereafter,  as  follows: 

One  per  centum  per  annum  upon  the  amount  by  which  the  total  net  in- 
come exceeds  $5,000  and  does  not  exceed  $7,500; 

Two  per  centum  per  annum  upon  the  amount  by  which  the  total  net  in- 
come exceeds  $7,500  and  does  not  exceed  $10,000; 

Three  per  centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceeds  $10,000  and  does  not  exceed  $12,500; 

Four  per  centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceeds  $12,500  and  does  not  exceed  $15,000; 

Five  per  centum  per  annum  upon  the  amount  by  which  the  total  net  in- 
come exceeds  $15,000  and  does  not  exceed  $20,000; 

Seven  per  centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceeds  $20,000  and  does  not  exceed  $40,000; 

Ten  per  centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceeds  $40,000  and  does  not  exceed  $60,000; 

Fourteen  per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $60,000  and  does  not  exceed  $80,000; 

Eighteen  per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $80,000  and  does  not  exceed  $100,000; 

Twenty-two  per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $100,000  and  does  not  exceed  $150,000; 

Twenty-five  per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $150,000  and  does  not  exceed  $200,000; 


250  APPENDIX  B 

Thirty  per  centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceeds  $200,000  and  does  not  exceed  $250,000; 

Thirty-four  per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $250,000  and  does  not  exceed  $300,000. 

Thirty-seven  per  centum  per  annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $300,000  and  does  not  exceed  $500,000; 

Forty  per  centum  per  annum  upon  the  amount  by  which  the  total  net 
income  exceeds  $500,000  and  does  not  exceed  $750,000. 

Forty-five  per  centum  per  annum  upon  the  amount  by  which  the  total 
net  income  exceeds  $750,000  and  does  not  exceed  $1,000,000. 

Fifty  per  centum  per  annum  upon  the  amount  by  which  the  total  net  in- 
come exceeds  $1,000,000. 

SEC.  3.  That  the  taxes  imposed  by  sections  one  and  two  of  this  Act  shall 
be  computed,  levied,  assessed,  collected,  and  paid  upon  the  same  basis  and 
Basis  of  *n  *ke  same  manner  as  tne  similar  taxes  imposed  by  section 
Computa-  one  °f  such  Act  °f  September  eighth,  nineteen  hundred  and 
tion  same  sixteen,  except  that  in  the  case  of  the  tax  imposed  by  section 
as  under  one  of  this  Act  (a)  the  exemptions  of  $3,000  and  $4,000  pro- 
Act  of  vided  in  section  seven  of  such  Act  of  September  eighth,  nine- 
1916.  teen  hundred  and  sixteen,  as  amended  by  this  Act,  shall  be, 
respectively,  $1,000  and  $2,000,  and  (b)  the  returns  required  under  subdi- 
visions (b)  and  (c)  of  section  eight  of  such  Act  as  amended  by  this  Act  shall 
Exemp-  be  required  in  the  case  of  net  incomes  of  $1,000  or  over,  in  the 
tionsRe-  case  of  unmarried  persons,  and  $2,000  or  over  in  the  case  of 
turns.  married  persons,  instead  of  $3,000  or  over,  as  therein  provided, 
and  (c)  the  provisions  of  subdivision  (c)  of  section  nine  of  such  Act,  as 
amended  by  this  Act,  requiring  the  normal  tax  of  individuals  on  income  de- 
Withhold-  rived  from  interest  to  be  deducted  and  withheld  at  the  source 
ing  How  of  the  income  shall  not  apply  to  the  new  two  per  centum  nor- 
Applied.  mal  tax  prescribed  in  section  one  of  this  Act  until  on  and  after 
January  first,  nineteen  hundred  and  eighteen,  and  thereafter  only  one  two 
per  centum  normal  tax  shall  be  deducted  and  withheld  at  the  source  under 
the  provisions  of  such  subdivision  (c),  and  any  further  normal  tax  for  which 
the  recipient  of  such  income  is  liable  under  this  Act  or  such  Act  of  September 
eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Act,  shall  be  paid 
by  such  recipient. 

SEC.  4.  That  in  addition  to  the  tax  imposed  by  subdivision  (a)  of  section 
ten  of  such  Act  of  September  eighth,  nineteen  hundred  and  sixteen,  as 
Corpora-  amended  by  this  Act,  there  shall  be  levied,  assessed,  collected, 
tions  Rate,  and  paid  a  like  tax  of  four  per  centum  upon  the  income  re- 
ceived in  the  calendar  year  nineteen  hundred  and  seventeen  and  every 
calendar  year  thereafter,  by  every  corporation,  joint-stock  company  or  as- 
Fiscal  sociation,  or  insurance  company,  subject  to  the  tax  imposed 
Year.  by  that  subdivision  of  that  section,  except  that  if  it  has  fixed 
its  own  fiscal  year,  the  tax  imposed  by  this  section  for  the  fiscal  year  ending 
during  the  calendar  year  nineteen  hundred  and  seventeen  shall  be  levied, 
assessed,  collected,  and  paid  only  on  that  proportion  of  its  income  for  such 
fiscal  year  which  the  period  between  January  first,  nineteen  hundred  and 


WAR  EXCESS  PROFITS  TAX  LAW  251 

seventeen,  and  the  end  of  such  fiscal  year  bears  to  the  whole  of  such  fiscal 
year. 

The  tax  imposed  by  this  section  shall  be  computed,  levied,  assessed,  col- 
lected, and  paid  upon  the  same  incomes  and  in  the  same  manner  as  the  tax 
imposed  by  subdivision  (a)  of  section  ten  of  such  Act  of  Sep-  Basis  of 
tember  eighth,  nineteen  hundred  and  sixteen,  as  amended  by  Computa- 
this  Act,  except  that  for  the  purpose  of  the  tax  imposed  by  this  tion. 
section  the  income  embraced  hi  a  return  of  a  corporation,  joint-stock  com- 
pany or  association,  or  insurance  company,  shall  be  credited  with  the  amount 
received  as  dividends  upon  the  stock  or  from  the  net  earnings  of  any  other 
corporation,  joint-stock  company  or  association,  or  insurance  company, 
which  is  taxable  upon  its  net  income  as  provided  in  this  title. 

SEC.  5.  That  the  provisions  of  this  title  shall  not  extend  to  Not  Appli- 
Porto  Rico  or  the  Philippine  Islands,  and  the  Porto  Rican  or  cable  to 
Philippine  Legislature  shall  have  power  by  due  enactment  to  Porto  Rico 
amend,  alter,  modify,  or  repeal  the  income  tax  laws  in  force  and  Phil- 
in  Porto  Rico  or  the  Philippine  Islands,  respectively.  ippines. 

TITLE  n.— WAR  EXCESS  PROFITS  TAX 

SEC.  200.  That  when  used  in  this  title — 

The  term  "corporation"  includes  joint-stock  companies  or  "  Corpora- 
associations  and  insurance  companies;  tion." 

The  term  "domestic"  means  created  under  the  law  of  the   "  Domes- 
United  States,  or  of  any  State,  Territory,  or  District  thereof,   tic." 
and  the  term  "foreign"  means  created  under  the  law  of  any  other  posses- 
sion of  the  United  States  or  of  any  foreign  country  or  govern-  «  rjnjted 
ment;  States." 

The  term  "United  States"  means  only  the  States,  the  Ter-  .      „ 

ritories  of  Alaska  and  Hawaii,  and  the  District  of  Columbia;  reign. 

The  term  "taxable  year"  means  the  twelve  months  ending  December 
thirty-first,  excepting  in  the  case  of  a  corporation  or  partnership  which  has 
fixed  its  own  fiscal  year,  in  which  case  it  means  such  fiscal  "  Taxable 
year.  The  first  taxable  year  shall  be  the  year  ending  December  Year." 
thirty-first,  nineteen  hundred  and  seventeen,  except  that  in  the  case  of  a 
corporation  or  partnership  which  has  fixed  its  own  fiscal  year,  it  shall  be 
the  fiscal  year  ending  during  the  calendar  year  nineteen  hundred  and  seven- 
teen. If  a  corporation  or  partnership,  prior  to  March  first,  nineteen  hundred 
and  eighteen,  makes  a  return  covering  its  own  fiscal  year,  and  includes 
therein  the  income  received  during  that  part  of  the  fiscal  year  falling  within 
the  calendar  year  nineteen  hundred  and  sixteen,  the  tax  for  such  taxable 
year  shall  be  that  proportion  of  the  tax  computed  upon  the  net  income  during 
such  full  fiscal  year  which  the  time  from  January  first,  nineteen  hundred  and 
seventeen,  to  the  end  of  such  fiscal  year  bears  to  the  full  fiscal  year;  and 

The  term  "prewar  period"  means  the  calendar  years  nineteen  hundred 
and  eleven,  nineteen  hundred  and  twelve,  and  nineteen  hundred  and  thirteen, 
or,  if  a  corporation  or  partnership  was  not  in  existence  or  an   "  Prewar 
individual  was  not  engaged  in  a  trade  or  business  during  the  Period." 


2$2  APPENDIX  B 

whole  of  such  period,  then  as  many  of  such  years  during  the  whole  of  which 
the  corporation  or  partnership  was  in  existence  of  the  individual  was  en- 
"  Trade  "  gaged  in  the  trade  or  business. 

and  "  Busi-  The  terms  "trade"  and  "business"  include  professions  and 
ness."  occupations. 

The  term  "net  income"  means  in  the  case  of  a  foreign  corporation  or 
"  Net  In-  partnership  or  a  nonresident  alien  individual,  the  net  income 
come."  received  from  sources  within  the  United  States. 

SEC.  201.  That  in  addition  to  the  taxes  under  existing  law  and  under 
this  act  there  shall  be  levied,  assessed,  collected,  and  paid  for  each  taxable 
Additional  year  upon  the  income  of  every  corporation,  partnership,  or 
Taxes.  individual,  a  tax  (hereinafter  in  this  title  referred  to  as  the 

tax)  equal  to  the  following  percentages  of  the  net  income: 
P  Twenty  per  centum  of  the  amount  of  the  net  income  in  ex- 

cess of  the  deduction  (determined  as  hereinafter  provided)  and 
not  in  excess  of  fifteen  per  centum  of  the  invested  capital  for  the  taxable  year; 

Twenty-five  per  centum  of  the  amount  of  the  net  income  in  excess  of 
fifteen  per  centum  and  not  in  excess  of  twenty  per  centum  of  such  capital; 

Thirty-five  per  centum  of  the  amount  of  the  net  income  in  excess  of  twenty 
per  centum  and  not  in  excess  of  twenty-five  per  centum  of  such  capital; 

Forty-five  per  centum  of  the  amount  of  the  net  income  in  excess  of 
twenty-five  per  centum  and  not  in  excess  of  thirty-three  per  centum  of  such 
capital;  and 

Sixty  per  centum  of  the  amount  of  the  net  income  in  excess  of  thirty- 
three  per  centum  of  such  capital. 

For  the  purpose  of  this  title  every  corporation  or  partnership  not  exempt 
under  the  provisions  of  this  section  shall  be  deemed  to  be  engaged  in  busi- 
ness, and  all  the  trades  and  businesses  in  which  it  is  engaged  shall  be  treated 
as  a  single  trade  or  business,  and  all  its  income  from  whatever  source  derived 
shall  be  deemed  to  be  received  from  such  trade  or  business. 

This  title  shall  apply  to  all  trades  or  businesses  of  whatever  description, 
whether  continuously  carried  on  or  not,  except — 

(a)  In  the  case  of  officers  and  employees  under  the  United  States,  or  any 
Incomes        State,  Territory,  or  the  District  of  Columbia,  or  any  local 
Exempt.        subdivision  thereof,  the  compensation  or  fees  received  by 
them  as  such  officers  or  employees; 

(b)  Corporations  exempt  from  tax  under  the  provisions  of  section  eleven 
of  Title  I  of  such  Act  of  September  eighth,  nineteen  hundred  and  sixteen, 
as  amended  by  this  Act,  and  partnerships  and  individuals  carrying  on  or 
doing  the  same  business,  or  coming  within  the  same  description;  and 

(c)  Incomes  derived  from  the  business  of  life,  health,  and  accident  insur- 
ance combined  in  one  policy  issued  on  the  weekly  premium  payment  plan. 

SEC.  202.  That  the  tax  shall  not  be  imposed  in  the  case  of  the  trade  or 
business  of  a  foreign  corporation  or  partnership  or  a  nonresident  alien  in- 
dividual, the  net  income  of  which  trade  or  business  during  the  taxable  year 
is  less  than  $3,000. 

Deduc-  SEC.  203.  That  for  the  purposes  of  this  title  the  deduction 

tions.  shall  be  as  follows,  except  as  otherwise  in  this  title  provided — 


WAR  EXCESS  PROFITS  TAX  LAW  253 

(a)  In  the  case  of  a  domestic  corporation,  the  sum  of  (i)  an  amount  equal 
to  the  same  percentage  of  the  invested  capital  for  the  taxable  year  which 
the  average  amount  of  the  annual  net  income  of  the  trade  Domestic 
or  business  during  the  prewar  period  was  of  the  invested  capi-   Corpora- 
tal  for  the  prewar  period  (but  not  less  than  seven  or  more   tion. 

than  nine  per  centum  of  the  invested  capital  for  the  taxable  year),  and 
(2)  $3,000; 

(b)  In  the  case  of  a  domestic  partnership  or  of  a  citizen  or  resident  of 
the  United  States,  the  sum  of  (i)  an  amount  equal  to  the  same   Domestic 
percentage  of  the  invested  capital  for  the  taxable  year  which  Partner- 
the  average  amount  of  the  annual  net  income  of  the  trade  or  ship- 
business  during  the  prewar  period  was  of  the  invested  capital   Citizen  or 
for  the  prewar  period  (but  not  less  than  seven  or  more  than   Resident. 
nine  per  centum  of  the  invested  capital  for  the  taxable  year),  and  (2)  $6,000; 

(c)  In  the  case  of  a  foreign  corporation  or  partnership  Foreign 
or  of  a  nonresident  alien  individual,  an  amount  ascertained   Corpora- 
in  the  same  manner  as  provided  in  subdivisions   (a)   and 

(b)  without  any  exemption  of  $3,000  or  $6,000. 

(d)  If  the  Secretary  of  the  Treasury  is  unable  satisfac-  ^^        p,.e_ 
torily  to  determine  the  average  amount  of  the  annual  net  warjn_ 
income  of  the  trade  or  business  during  the  prewar  period,  come  not 
the  deduction  shall  be  determined  in  the  same  manner  as  Deter- 
provided  in  section  two  hundred  and  five.  minable. 

SEC.  204.  That  if  a  corporation  or  partnership  was  not  in  existence,  or 
an  individual  was  not  engaged  in  the  trade  or  business,  during  the  whole 
of  any  one  calendar  year  during  the  prewar  period,  the  de-   Not  in 
duction  shall  be  an  amount  equal  to  eight  per  centum  of  the  Business 
invested  capital  for  the  taxable  year,  plus  in  the  case  of  a  During 
domestic  corporation  $3,000,  and  in  the  case  of  a  domestic  Prewar 
partnership  or  a  citizen  or  resident  of  the  United  States  $6,000.   Period. 

A  trade  or  business  carried  on  by  a  corporation,  partnership,  or  individual* 
although  formally  organized  or  reorganized  on  or  after  January  second, 
nineteen  hundred  and  thirteen,  which  is  substantially  a  con-   Continua- 
tinuation  of  a  trade  or  business  carried  on  prior  to  that  date,   tion  of  Old 
shall,  for  the  purposes  of  this  title,  be  deemed  to  have  been  Business. 
in  existence  prior  to  that  date,  and  the  net  income  and  invested  capital 
of  its  predecessor  prior  to  that  date  shall  be  deemed  to  have  been  its  net 
income  and  invested  capital. 

SEC.  205.  (a)  That  if  the  Secretary  of  the  Treasury,  upon  complaint 
finds  either  (i)  that  during  the  prewar  period  a  domestic  corporation  or 
partnership,  or  a  citizen  or  resident  of  the  United  States,  had   Compara- 
no  net  income  from  the  trade  or  business,  or  (2)  that  during  tivelyLow 
the  prewar  period  the  percentage,  which  the  net  income  was  Netln- 
of  the  invested  capital,  was  low  as  compared  with  the  per-  comeDur- 
centage,  which  the  net  income  during  such  period  of  repre-   ing  Prewar 
sentative  corporations,  partnerships,  and  individuals,  engaged   Period— 
in  a  like  or  similar  trade  or  business,  was  of  their  invested   Complaint. 
capital,  then  the  deduction  shall  be  the  sum  of  (i)  an  amount  equal  to  the 


254  APPENDIX  B 

same  percentage  of  its  invested  capital  for  the  taxable  year  which  the  aver- 
age deduction  (determined  in  the  same  manner  as  provided  in  section  two 
hundred  and  three,  without  including  the  $3,000  or  $6,000  therein  referred 
to)  for  such  year  of  representative  corporations,  partnerships,  or  individuals, 
engaged  in  a  like  or  similar  trade  or  business,  is  of  their  average  invested 
capital  for  such  year  plus  (2)  in  the  case  of  a  domestic  corporation  $3,000, 
and  in  the  case  of  a  domestic  partnership  or  a  citizen  or  resident  of  the 
Percent-  United  States  $6,000. 

age  Net  ^ne  Percentage  which  the  net  income  was  of  the  invested 

Income  to  capital  in  each  trade  or  business  shall  be  determined  by  the 
Invested  Commissioner  of  Internal  Revenue,  in  accordance  with 
Capital  regulations  prescribed  by  him,  with  the  approval  of  the 
Deter-  Secretary  of  the  Treasury.  In  the  case  of  a  corporation 

mined  by       or  partnership  which  has  fixed  its  own  fiscal  year,  the  per- 
Depart-         centage  determined   by   the   calendar  year   ending  during 
such  fiscal  year  shall  be  used. 

(b)  The  tax  shall  be  assessed  upon  the  basis  of  the  deduction  determined 
as  provided  in  section  two  hundred  and  three,  but  the  taxpayer  claiming 
Claim  for  the  benefit  of  this  section  may  at  the  tune  of  making  the 
Abate-  return  file  a  claim  for  abatement  of  the  amount  by  which  the 

ment.  tax  so  assessed  exceeds  a  tax  computed  upon  the  basis  of  the 

deduction  determined  as  provided  in  this  section.  In  such  event,  collection 
of  the  part  of  the  tax  covered  by  such  claim  for  abatement  shall  not  be 
made  until  the  claim  is  decided,  but  if  in  the  judgment  of  the  Commissioner 
of  Internal  Revenue,  the  interests  of  the  United  States  would  be  jeopardized 
thereby  he  may  require  the  claimant  to  give  a  bond  in  such  amount  and 
with  such  sureties  as  the  commissioner  may  think  wise  to  safeguard  such 
interests,  conditioned  for  the  payment  of  any  tax  found  to  be  due,  with 
the  interest  thereon,  and  if  such  bond,  satisfactory  to  the  commissioner,  is 
not  given  within  such  time  as  he  prescribes,  the  full  amount  of  tax  assessed 
shall  be  collected  and  the  amount  overpaid,  if  any,  shall  upon  final  deci- 
sion of  the  application  be  refunded  as  a  tax  erroneously  or  illegally  col- 
lected. 

SEC.  206.  That  for  the  purposes  of  this  title  the  net  income  of  a  corpora- 
tion shall  be  ascertained  and  returned  (a)  for  the  calendar  years  nineteen 
Net  In-  hundred  and  eleven  and  nineteen  hundred  and  twelve  upon 
come  of  tne  same  basis  and  in  the  same  manner  as  provided  in  section 
Corpora-  thirty-eight  of  the  Act  entitled  "An  Act  to  provide  revenue, 
tion,  How  equalize  duties,  and  encourage  the  industries  of  the  United 
Deter-  States,  and  for  other  purposes,"  approved  August  fifth,  nine- 

muied  teen  hundred  and  nine,  except  tnat  income  taxes  paid  by  it 

1Q1  \' 1912>  within  tne  year  imPosed  by  tne  authority  of  the  United  States 
shall  be  included;  (b)  for  the  calendar  year  nineteen  hundred 
and  thirteen  upon  the  same  basis  and  in  the  same  manner  as  provided  in 
section  II  of  the  Act  entitled  "An  Act  to  reduce  tariff  duties  and  to  provide 
revenue  for  the  Government,  and  for  other  purposes,"  approved  October 
third,  nineteen  hundred  and  thirteen,  except  that  income  taxes  paid  by  it 
within  the  year  imposed  by  the  authority  of  the  United  States  shall  be  in- 


WAR  EXCESS  PROFITS  TAX  LAW  255 

eluded,  and  except  that  the  amounts  received  by  it  as  dividends  upon  the 
stock  or  from  the  net  earnings  of  other  corporations,  joint-stock  companies 
or  associations,  or  insurance  companies,  subject  to  the  tax  imposed  by 
section  II  of  such  Act  of  October  third,  nineteen  hundred  and  thirteen, 
shall  be  deducted;  and  (c)  for  the  taxable  year  upon  the  same  basis  and  in 
the  same  manner  as  provided  in  Title  I  of  the  Act  entitled  ForTax- 
"An  Act  to  increase  the  revenue,  and  for  other  purposes,"  able  Year. 
approved  September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by 
this  Act,  except  that  the  amounts  received  by  it  as  dividends  upon  the  stock 
or  from  the  net  earnings  of  other  corporations,  joint-stock  companies  or 
associations,  or  insurance  companies,  subject  to  the  tax  imposed  by  Title  1 
of  such  Act  of  September  eighth,  nineteen  hundred  and  sixteen,  shall  be 
deducted. 

The  net  income  of  a  partnership  or  individual  shall  be  ascertained  and 
returned  for  the  calendar  years  nineteen  hundred  and  eleven,  nineteen 
hundred  and  twelve,  and  nineteen  hundred  and  thirteen,  and  j^et  ^ 
for  the  taxable  year,  upon  the  same  basis  and  in  the  same   come  of 
manner  as  provided  in  Title  I  of  such  Act  of  September  eighth,  Partner- 
nineteen  hundred  and  sixteen,  as  amended  by  this  Act,  except  ship  or  In- 
that  the  credit  allowed  by  subdivision  (b)  of  section  five  of  dividual, 
such  Act  shall  be  deducted.    There  shall  be  allowed  (a)  in  the   How  De- 
case  of  a  domestic  partnership  the  same  deductions  as  allowed  terminea. 
to  individuals  in  subdivision  (a)  of  section  five  of  such  Act  of  September 
eighth,  nineteen  hundred  and  sixteen,  as  amended  by  this  Act;  and  (b)  in 
the  case  of  a  foreign  partnership  the  same  deductions  as  allowed  to  indi- 
viduals in  subdivision  (a)  of  section  six  of  such  Act  as  amended  by  this 
Act. 

SEC.  207.  That  as  used  hi  this  title,  the  term  "invested  capital"  for 
any  year  means  the  average  invested  capital  for  the  year,   Invested 
as  defined  and  limited  in  this  title,  averaged  monthly.  Capital 

As  used  in  this  title  "invested  capital"  does  not  include  Defined. 
stocks,  bonds  (other  than  obligations  of  the  United  States),  or  other  assets, 
the  income  from  which  is  not  subject  to  the  tax  imposed  by  this  title  nor 
money  or  other  property  borrowed,  and  means,  subject  to  the  above  limi- 
tations: 

(a)  In  the  case  of  a  corporation  or  partnership:  (i)  Actual  cash  paid  in, 
(2)  the  actual  cash  value  of  tangible  property  paid  in  other  than  cash,  for 
stock  or  shares  in  such  corporation  or  partnership,  at  the   Corpora- 
time  of  such  payment  (but  in  case  such  tangible  property  tionor 
was  paid  in  prior  to  January  first,  nineteen  hundred  and  four-  Partner- 
teen,  the  actual  cash  value  of  such  property  as  of  January  ship. 
first,  nineteen  hundred  and  fourteen,  but  in  no  case  to  exceed  the  par  value 
of  the  original  stock  or  shares  specifically  issued  therefor),  and  (3)  paid  in 
or  earned  surplus  and  undivided  profits  used  or  employed  in  the  business, 
exclusive  of  undivided  profits  earned  during  the  taxable  year:  Provided, 
That  (a)  the  actual  cash  value  of  patents  and  copyrights  p  ,     , 
paid  in  for  stock  or  shares  in  such  corporation  or  partnership, 
at  the  time  of  such  payment,  shall  be  included  as  invested  capital,  but  not 


256  APPENDIX  B 

to  exceed  the  par  value  of  such  stock  or  shares  at  the  time  of  such  payment, 
G  d  Will  anc*  ^)  t^ie  &°°d  will*  trade-marks,  trade  brands,  the  franchise 
of  a  corporation  or  partnership,  or  other  intangible  property, 
shall  be  included  as  invested  capital  if  the  corporation  or  partnership  made 
payment  bona  fide  therefor  specifically  as  such  in  cash  or  tangible  property, 
the  value  of  such  good  will,  trade-mark,  trade  brand,  franchise,  or  intangible 
property,  not  to  exceed  the  actual  cash  or  actual  cash  value  of  the  tangible 
property  paid  therefor  at  the  time  of  such  payment;  but  good  will,  trade- 
marks, trade  brands,  franchise  of  a  corporation  or  partnership,  or  other 
intangible  property,  bona  fide  purchased,  prior  to  March  third,  nineteen 
hundred  and  seventeen,  for  and  with  interests  or  shares  in  a  partnership  or 
for  and  with  shares  in  the  capital  stock  of  a  corporation  (issued  prior  to 
Limited  March  third,  nineteen  hundred  and  seventeen),  in  an  amount 
Proportion  not  to  exceed,  on  March  third,  nineteen  hundred  and  seven- 
of  Capital  teen,  twenty  per  centum  of  the  total  interests  or  shares  in 
Stock.  tne  partnership  or  of  the  total  shares  of  the  capital  stock  of 

the  corporation,  shall  be  included  in  invested  capital  at  a  value  not  to  ex- 
ceed the  actual  cash  value  at  the  time  of  such  purchase,  and  in  case  of  issue 
of  stock  therefor  not  to  exceed  the  par  value  of  such  stock; 

(b)  In  the  case  of  an  individual,  (i)  actual  cash  paid  into  the  trade  or 
business,  and  (2)  the  actual  cash  value  of  tangible  property  paid  into  the 
Individual  trac*e  or  DUsmess>  other  than  cash,  at  the  time  of  such  pay- 
ment (but  in  case  such  tangible  property  was  paid  in  prior 
to  January  first,  nineteen  hundred  and  fourteen,  the  actual  cash  value  of 
such  property  as  of  January  first,  nineteen  hundred  and  fourteen),  and  (3) 
Patents,  the  actual  cash  value  of  patents,  copyrights,  good  will,  trade- 
Good  Will,  marks,  trade  brands,  franchises,  or  other  intangible  property, 
paid  into  the  trade  or  business,  at  the  time  of  such  payment,  if  payment 
was  made  therefor  specifically  as  such  in  cash  or  tangible  property,  not  to 
exceed  the  actual  cash  or  actual  cash  value  of  the  tangible  property  bona 
fide  paid  therefor  at  the  time  of  such  payment. 

Foreign  ^n  tne  case  °f  a  foreign  corporation  or  partnership  or  of  a 

Corpora-  nonresident  alien  individual  the  term  "invested  capital" 
tion — Part-  means  that  proportion  of  the  entire  invested  capital,  as  de- 
nership  fined  and  limited  in  this  title,  which  the  net  income  from 
Nonres-  sources  within  the  United  States  bears  to  the  entire  net 
ident  Alien.  income> 

SEC.  208.  That  in  case  of  the  reorganization,  consolidation  or  change  of 
ownership  of  a  trade  or  business  after  March  third,  nineteen  hundred  and 
Reorgani-  seventeen,  if  an  interest  or  control  in  such  trade  or  business  of 
zation.  fifty  per  centum  or  more  remains  in  control  of  the  same  per- 

sons, corporations,  associations,  partnerships,  or  any  of  them,  then  in  ascer- 
taining the  invested  capital  of  the  trade  or  business  no  asset  transferred  or 
Invested  received  from  the  prior  trade  or  business  shall  be  allowed  a 
Capital.  greater  value  than  would  have  been  allowed  under  this  title 
in  computing  the  invested  capital  of  such  prior  trade  or  business  if  such 
asset  had  not  been  so  transferred  or  received,  unless  such  asset  was  paid  for 
specifically  as  such,  in  cash  or  tangible  property,  and  then  not  to  exceed  the 


WAR  EXCESS  PROFITS   TAX   LAW  257 

actual  cash  or  actual  cash  value  of  the  tangible  property  paid  therefor  at  the 
time  of  such  payment. 

SEC.  209.  That  in  the  case  of  a  trade  or  business  having  no  invested 
capital  or  not  more  than  a  nominal  capital  there  shall  be  levied,  assessed, 
collected  and  paid,  in  addition  to  the  taxes  under  existing  Nominal 
law  and  under  this  Act,  in  lieu  of  the  tax  imposed  by  section   or  no 
two  hundred  and  one,  a  tax  equivalent  to  eight  per  centum  of   Capital, 
the  net  income  of  such  trade  or  business  in  excess  of  the  following  deduc- 
tions: In  the  case  of  a  domestic  corporation  $3,000,  and  in  the  case  of  a 
domestic  partnership  or  a  citizen  or  resident  of  the  United  States  $6,000;  in 
the  case  of  all  other  trades  or  business,  no  deduction. 

SEC.  210.  That  if  the  Secretary  of  the  Treasury  is  unable  in  any  case 
satisfactorily  to  determine  the  invested  capital,  the  amount  of  the  deduc- 
tion shall  be  the  sum  of  (i)  an  amount  equal  to  the  same   Where   In- 
proportion  of  the  net  income  of  the  trade  or  business  received   vested 
during  the  taxable  year  as  the  proportion  which  the  average   Capital  is 
deduction  (determined  in  the  same  manner  as  provided  in   not   Deter- 
section  two  hundred  and  three,  without  including  the  $3,000  minable. 
or  $6,000  therein  referred  to)  for  the  same  calendar  year  of  representative 
corporations,  partnerships,  and  individuals,  engaged  in  a  like  or  similar 
trade  or  business,  bears  to  the  total  net  income  of  the  trade  or  business  re- 
ceived by  such  corporations,  partnerships,  and  individuals,  plus  (2)  in  the 
case  of  a  domestic  corporation  $3,000,  and  in  the  case  of  a  domestic  partner- 
ship or  a  citizen  or  resident  of  the  United  States  $6,000. 

For  the  purpose  of  this  section  the  proportion  between  Pf0nor^on 
the  deduction  and  the  net  income  in  each  trade  or  business  of  Deduc- 
shall  be  determined  by  the  Commissioner  of  Internal  Revenue  tion  and 
in  accordance  with  regulations  prescribed  by  him,  with  the   Netln- 
approval  of  the  Secretary  of  the  Treasury.    In  the  case  of  a   come  De- 
corporation  or  partnership  which  has  fixed  its  own  fiscal  termined 
year,  the  proportion  determined  for  the  calendar  year  ending  ^y  Depart- 
during  such  fiscal  year  shall  be  used.  ment. 

SEC.  211.  That  every  foreign  partnership  having  a  net  income  of  $3,000 
or  more  for  the  taxable  year,  and  every  domestic  partnership  having  a  net 
income  of  $6,000  or  more  for  the  taxable  year,  shall  render  a  Partner- 
correct  return  of  the  income  of  the  trade  or  business  for  the   ship  Re- 
taxable  year,  setting  forth  specifically  the  gross  income  for  turns. 
such  year,  and  the  deductions  allowed  in  this  title.    Such  returns  shall  be 
rendered  at  the  same  time  and  in  the  same  manner  as  is  prescribed  for  income 
tax  returns  under  Title  I  of  such  Act  of  September  eighth,  nineteen  hundred 
and  sixteen,  as  amended  by  this  Act. 

SEC.  212.  That  all  administrative,  special,  and  general  provisions  of  law, 
including  the  laws  in  relation  to  the  assessment,  remission,  collection,  and 
refund  of  internal-revenue  taxes  not  heretofore  specifically  Adminis- 
repealed,  and  not  inconsistent  with  the  provisions  of  this  title   trative 
are  hereby  extended  and  made  applicable  to  all  the  provisions  Provisions, 
of  this  title  and  to  the  tax  herein  imposed,  and  all  provisions  of  Title  I  of  such 
Act  of  September  eighth,  nineteen  hundred  and  sixteen,  as  amended  by 


258  APPENDIX  B 

this  Act,  relating  to  returns  and  payment  of  the  tax  therein  imposed,  in- 
cluding penalties,  are  hereby  made  applicable  to  the  tax  imposed  by  this 
title. 

SEC.  213.  That  the  Commissioner  of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  shall  make  all  necessary  regulations  for 
Regula-  carrying  out  the  provisions  of  this  title,  and  may  require 
tions.  any  corporation,  partnership,  or  individual,  subject  to  the 

provisions  of  this  title,  to  furnish  him  with  such  facts,  data,  and  information 
as  in  his  judgment  are  necessary  to  collect  the  tax  imposed  by  this  title. 

SEC.  214.  That  Title  II  (sections  two  hundred  to  two  hundred  and  seven, 
Repeal  of  inclusive)  of  the  Act  entitled  "An  Act  to  provide  increased 
Old  Excess  revenue  to  defray  the  expenses  of  the  increased  appropriations 
Profits  Tax  for  the  Army  and  Navy,  and  the  extensions  of  fortifications, 
Law.  ancj  for  other  purposes,"  approved  March  third,  nineteen 

hundred  and  seventeen,  is  hereby  repealed. 

Any  amount  heretofore  or  hereafter  paid  on  account  of  the  tax  imposed 
Applica-  by  such  Title  II,  shall  be  credited  toward  the  payment  of 
tion  of  the  tax  imposed  by  this  title,  and  if  the  amount  so  paid  ex- 

Payments  ceeds  the  amount  of  such  tax  the  excess  shall  be  refunded  as  a 
Made.  tax  erroneously  or  illegally  collected. 

Subdivision  (i)  of  section  three  hundred  and  one  of  such  Act  of  Septem- 
Muni tions  ber  eighth,  nineteen  hundred  and  sixteen,  is  hereby  amended 
Tax  Re-  so  that  the  rate  of  tax  for  the  taxable  year  nineteen  hundred 
ducedto  and  seventeen  shall  be  ten  per  centum  instead  of  twelve  and 
10%  one-half  per  centum,  as  therein  provided. 

Subdivision  (2)  of  such  section  is  hereby  amended  to  read  as  follows: 

"(2)  This  section  jhall  cease  to  be  of  effect  on  and  after  January  first, 
nineteen  hundred  and  eighteen." 

TITLE  III.— WAR  TAX  ON  BEVERAGES 

SEC.  300.  That  on  and  after  the  passage  of  this  Act  there  shall  be  levied 
and  collected  on  all  distilled  spirits  in  bond  at  that  time  or  that  have  been 
Distilled  or  that  may  be  then  or  thereafter  produced  in  or  imported 
Spirits.  into  the  United  States,  except  such  distilled  spirits  as  are 
subject  to  the  tax  provided  in  section  three  hundred  and  three,  in  addition 
to  the  tax  now  imposed  by  law,  a  tax  of  $1.10  (or,  if  withdrawn  for  beverage 
Rate  of  purposes  or  for  use  in  the  manufacture  or  production  of  any 
Tax.  article  used  or  intended  for  use  as  a  beverage,  a  tax  of  $2.10) 

on  each  proof  gallon,  or  wine  gallon  when  below  proof,  and  a  proportionate 
tax  at  a  like  rate  on  all  fractional  parts  of  such  proof  or  wine  gallon,  to  be 
paid  by  the  distiller  or  importer  when  withdrawn,  and  collected  under  the 
provisions  of  existing  law. 

That  in  addition  to  the  tax  under  existing  law  there  shall  be  levied  and 
collected  upon  all  perfumes  hereafter  imported  into  the  United  States  con- 
Perfumes  taining  distilled  spirits,  a  tax  of  $1.10  per  wine  gallon,  and  a 
Containing  proportionate  tax  at  a  like  rate  on  all  fractional  parts  of  such 
Distilled  wine  gallon.  Such  tax  shall  be  collected  by  the  collector  of 
Spirits.  customs  and  deposited  as  internal-revenue  collections,  under 


WAR  TAX  ON  BEVERAGES  259 

such  rules  and  regulations  as  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  may  prescribe. 

SEC.  301.  That  no  distilled  spirits  produced  after  the  passage  of  this  Act 
shall  be  imported  into  the  United  States  from  any  foreign  country,  or  from 
the  West  Indian  Islands  recently  acquired  from  Denmark   Jmporta- 
(unless  produced  from  products  the  growth  of  such  islands,   tionPro- 
and  not  then  into  any  State  or  Territory  or  District  of  the  hibited. 
United  States  in  which  the  manufacture  or  sale  of  intoxicating  liquor  is 
prohibited),  or  from  Porto  Rico,  or  the  Philippine  Islands.     Under  such 
rules,  regulations,  and  bonds  as  the  Secretary  of  the  Treasury  Exception 
may  prescribe,  the  provisions  of  this  section  shall  not  apply 
to  distilled  spirits  imported  for  other  than  (i)  beverage  purposes  or  (2)  use 
in  the  manufacture  or  production  of  any  article  used  or  intended  for  use  as  a 
beverage. 

SEC.  302.  That  at  registered  distilleries  producing  alcohol,  or  other  high- 
proof  spirits,  packages  may  be  filled  with  such  spirits  reduced  to  not  less 
than  one  hundred  proof  from  the  receiving  cisterns  and  tax  paid  Bonded 
without  being  entered  into  bonded  warehouse.  Such  spirits  may  Ware- 
be  also  transferred  from  the  receiving  cisterns  at  such  distill-   houses, 
eries,  by  means  of  pipe  lines,  direct  to  storage  tanks  in  the  Transfers, 
bonded  warehouse  and  may  be  warehoused  in  such  storage  tanks.     Such 
spirits  may  be  also  transferred  in  tanks  or  tank  cars  to  general  bonded  ware- 
houses for  storage  therein,  either  in  storage  tanks  in  such  warehouses  or  in  the 
tanks  in  which  they  were  transferred.    Such  spirits  may  also  be   Regula- 
transferred  after  tax  payment  from  receiving  cisterns  or  ware-  tions  for 
house  storage  tanks  to  tanks  or  tank  cars  and  may  be  trans-  Drawing, 
ported  in  such  tanks  or  tank  cars  to  the  premises  of  rectifiers  etc. 
of  spirits.   The  Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  is  hereby  empowered  to  prescribe  all  necessary 
regulations  relating  to  the  drawing  off,  transferring,  gauging,  storing  and 
transporting  of  such  spirits;  the  records  to  be  kept  and  returns  to  be  made; 
the  size  and  kind  of  packages  and  tanks  to  be  used;  the  marking,  branding, 
numbering  and  stamping  of  such  packages  and  tanks;  the  kinds  of  stamps, 
if  any,  to  be  used;  and  the  time  and  manner  of  paying  the  tax;  the  kind  of 
bond  and  the  penal  sum  of  same.    The  tax  prescribed  by  law  must  be  paid 
before  such  spirits  are  removed  from  the  distillery  premises,   __.         _ 
or   from   general  bonded  warehouse  in  the  case  of   spirits  pavabje  * 
transferred  thereto,  except  as  otherwise  provided  by  law. 

Under  such  regulations  as  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  may  prescribe,  distilled 
spirits  may  hereafter  be  drawn  from  receiving  cisterns  and  Ethyl  and 
deposited  in  distillery  warehouses  without  having  affixed  to  Denatured 
the  packages  containing  the  same  distillery  warehouse  stamps,  Alcohol, 
and  such  packages,  when  so  deposited  in  warehouse,  may  be  withdrawn 
therefrom  on  the  original  gauge  where  the  same  have  remained  in  such 
warehouse  for  a  period  not  exceeding  thirty  days  from  the  date  of  de- 
posit. 

Under  such  regulations  as  the  Commissioner  of  Internal  Revenue,  with 


260  APPENDIX  B 

the  approval  of  the  Secretary  of  the  Treasury,  may  prescribe,  the  manu- 
Regula-  facture,  warehousing,  withdrawal,  and  shipment,  under  the 
tions  Ethyl  provisions  of  existing  law,  of  ethyl  alcohol  for  other  than  (i) 
Alcohol  beverage  purposes  or  (2)  use  in  the  manufacture  or  production 
Manufac-  Of  anv  article  used  or  intended  for  use  as  a  beverage,  and  de- 
ture'  natured  alcohol,  may  be  exempted  from  the  provisions  of  section 

thirty-two  hundred  and  eighty-three,  Revised  Statutes  of  the  United  States. 

Under  such  regulations  as  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  may  prescribe,  manufacturers 
of  ethyl  alcohol  for  other  than  beverage  purposes  may  be  granted  permission 
under  the  provisions  of  section  thirty-two  hundred  and  eighty-five,  Revised 
Statutes  of  the  United  States,  to  fill  fermenting  tub  in  a  sweet-mash  distillery 
not  of tener  than  once  in  forty-eight  hours. 

SEC.  303.  That  upon  all  distilled  spirits  produced  in  or  imported  into  the 
United  States  upon  which  the  tax  now  imposed  by  law  has  been  paid,  and 
Tax  on  which,  on  the  day  this  Act  is  passed,  are  held  by  a  retailer  in  a 

Stock  Dis-  quantity  in  excess  of  fifty  gallons  in  the  aggregate,  or  by  any 
tilled  other  person,  corporation,  partnership,  or  association  in  any 

Spirits.  quantity,  and  which  are  intended  for  sale,  there  shall  be 

levied,  assessed,  collected,  and  paid  a  tax  of  $1.10  (or,  if  intended  for  sale  for 
beverage  purposes  or  for  use  in  the  manufacture  or  production  of  any  article 
used  or  intended  for  use  as  a  beverage,  a  tax  of  $2.10)  on  each  proof  gallon, 
Rate  of  and  a  proportionate  tax  at  a  like  rate  on  all  fractional  parts 
Tax.  of  such  proof  gallon:  Provided,  That  the  tax  on  such  distilled 

spirits  in  the  custody  of  a  court  of  bankruptcy  in  insolvency  proceedings 
on  June  first,  nineteen  hundred  and  seventeen,  shall  be  paid  by  the  person 
to  whom  the  court  delivers  such  distilled  spirits  at  the  time  of  such  delivery, 
to  the  extent  that  the  amount  thus  delivered  exceeds  the  fifty  gallons  herein- 
before provided. 

SEC.  304.  That  in  addition  to  the  tax  now  imposed  or  imposed  by  this  Act 
on  distilled  spirits  there  shall  be  levied,  assessed,  collected,  and  paid  a  tax  of 
Additional  15  cents  on  each  proof  gallon  and  a  proportionate  tax  at  a  like 
Tax.  rate  on  all  fractional  parts  of  such  proof  gallon  on  all  distilled 

spirits  or  wines  hereafter  rectified,  purified,  or  refined  in  such  manner,  and 
on  all  mixtures  hereafter  produced  in  such  manner,  that  the  person  so  recti- 
fying, purifying,  refining,  or  mixing  the  same  is  a  rectifier  within  the  meaning 
~ .  of  section  thirty-two  hundred  and  forty-four,  Revised  Statutes, 

as  amended,  and  on  all  such  articles  in  the  possession  of  the 
rectifier  on  the  day  this  Act  is  passed:  Provided,  That  this  tax  shall  not  apply 
to  gin  produced  by  the  redistillation  of  a  pure  spirit  over  juniper  berries 
and  other  aromatics. 

When  the  process  of  rectification  is  completed  and  the  tax  prescribed  by 
this  section  has  been  paid,  it  shall  be  unlawful  for  the  rectifier  or  other  dealer 
Diluting  to  reduce  in  proof  or  increase  in  volume  such  spirits  or  wine  by 
Prohibited,  the  addition  of  water  or  other  substance;  nothing  herein  con- 
tained shall,  however,  prevent  a  rectifier  from  using  again  in  the  process  of 
rectification  spirits  already  rectified  and  upon  which  the  tax  has  theretofore 
been  paid. 


WAR  TAX  ON  BEVERAGES  261 

The  tax  imposed  by  this  section  shall  not  attach  to  cordials  or  liqueurs  on 
which  a  tax  is  imposed  and  paid  under  the  Act  entitled  "An  Act  to  increase 
the  revenue,  and  for  other  purposes,"  approved  September  Cordials, 
eighth,   nineteen  hundred  and   sixteen,  nor  to   the  mixing  Liqueurs 
and  blending  of  wines,  where  such  blending  is  for  the  sole  pur-   not  Af- 
pose  of  perfecting  such  wines  according  to  commercial  stand-   fected. 
ards,  nor  to  blends  made  exclusively  of  two  or  more  pure  straight  whiskies 
aged  in  wood  for  a  period  not  less  than  four  years  and  without  the  addi- 
tion of  coloring  or  flavoring  matter  or  any  other  substance  than  pure  water 
and  if  not  reduced  below  ninety  proof:  Provided,  That  such  blended  whiskies 
shall  be  exempt  from  tax  under  this  section  only  when  com-   Blended 
pounded  under  the  immediate  supervision  of  a  revenue  officer,   Whiskies, 
in  such  tanks  and  under  such  conditions  and  supervision  as  the  Commis- 
sioner of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the  Treas- 
ury, may  prescribe. 

All  distilled  spirits  taxable  under  this  section  shall  be  subject  to  uniform 
regulations  concerning  the  use  thereof  in  the  manufacture,   Uniform 
blending,  compounding,  mixing,  marking,  branding,  and  sale   Regula- 
of  whisky  and  rectified  spirits,  and  no  discrimination  whatso-   tions. 
ever  shall  be  made  by  reason  of  a  difference  in  the  character  of  the  material 
from  which  same  may  have  been  produced. 

The  business  of  a  rectifier  of  spirits  shall  be  carried  on,  and  the  tax  on 
rectified  spirits  shall  be  paid,  under  such  rules,  regulations,   ^     ,./. 
and  bonds  as  may  be  prescribed  by  the  Commissioner  of  In- 
ternal Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury. 

Any  person  violating  any  of  the  provisions  of  this  section  shall  be  deemed 
to  be  guilty  of  a  misdemeanor  and,  upon  conviction,  shall  be  Penalty  for 
fined  not  more  than  $1,000  or  imprisoned  not  more  than  two  Violations, 
years.    He  shall,  in  addition,  be  liable  to  double  the  tax  evaded  together 
with  the  tax,  to  be  collected  by  assessment  or  on  any  bond  given. 

SEC.  305.  That  hereafter  collectors  of  internal  revenue  shall  not  furnish 
wholesale  liquor  dealer's  stamps  in  lieu  of  and  in  exchange   Stamps  Ex- 
for  stamps  for  rectified  spirits  unless  the  package  covered  changed, 
by  stamp  for  rectified  spirits  is  to  be  broken  into  smaller  packages. 

The  Commissioner  of  Internal  Revenue,  with  the  approval   stamps 
of  the  Secretary  of  the  Treasury,  is  authorized  to  discon-  maybe 
tinue  the  use  of  the  following  stamps  whenever  in  his  judg-  Discon- 
ment   the  interests  of  the   Government  will  be  subserved  tinued. 
thereby: 

Distillery  warehouse,  special  bonded  warehouse,  special  bonded  reware- 
house,  general  bonded  warehouse,  general  bonded  retransfer,  transfer 
brandy,  export  tobacco,  export  cigars,  export  oleomargarine  and  export 
fermented  liquor  stamps. 

SEC.  306.  That  the  Commissioner  of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  is  hereby  authorized  to  require  at  distil- 
leries, breweries,  rectifying  houses,  and  wherever  else  in  his    .  . 
judgment  such  action  may  be  deemed  advisable,  the  installa- 
tion of  meters,  tanks,  pipes,  or  any  other  apparatus  for  the  purpose  of  pro- 


262  APPENDIX  B 

tecting  the  revenue,  and  such  meters,  tanks,  and  pipes  and  all  necessary 
labor  incident  thereto  shall  be  at  the  expense  of  the  person,  corporation, 
partnership,  or  association  on  whose  premises  the  installation  is  required. 
Any  such  person,  corporation,  partnership,  or  association  refusing  or  neg- 
lecting to  install  such  apparatus  when  so  required  by  the  commissioner  shall 
not  be  permitted  to  conduct  business  on  such  premises. 

SEC.  307.  That  on  and  after  the  passage  of  this  Act  there  shall  be  levied 
and  collected  on  all  beer,  larger  beer,  ale,  porter,  and  other  similar  fermented 
Beer,  Ale,  liquor,  containing  one-half  per  centum  or  more  of  alcohol, 
etc.  brewed  or  manufactured  and  sold,  or  stored  in  warehouse, 

or  removed  for  consumption  or  sale,  within  the  United  States,  by  whatever 
name  such  liquors  may  be  called,  in  addition  to  the  tax  now  imposed  by  law, 
a  tax  of  $1.50  for  every  barrel  containing  not  more  than  thirty-one  gallons,, 
and  at  a  like  rate  for  any  other  quantity  or  for  the  fractional  parts  of  a  barrel 
authorized  and  denned  by  law. 

SEC.  308.  That  from  and  after  the  passage  of  this  Act  taxable  fermented 
liquors  may  be  conveyed  without  payment  of  tax  from  the  brewery  premises 
Fermented  where  produced  to  a  contiguous  industrial  distillery  of  either 
Liquors  class  established  under  the  Act  of  October  third,  nineteen 
Conveyed,  hundred  and  thirteen,  to  be  used  as  distilling  material,  and 
the  residue  from  such  distillation,  containing  less  than  one-half  of  one  per 
centum  of  alcohol  by  volume,  which  is  to  be  used  in  making  beverages, 
may  be  manipulated  by  cooling,  flavoring,  carbonating,  settling,  and  filtering 
on  the  distillery  premises  or  elsewhere. 

The  removal  of  the  taxable  fermented  liquor  from  the  brewery  to  the 
distillery  and  the  operation  of  the  distillery  and  removal  of  the  residue 
Removal  therefrom  shall  be  under  the  supervision  of  such  officer  or 
of  Liquor,  officers  as  the  Commissioner  of  Internal  Revenue  shall  deem 
proper,  and  the  Commissioner  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  of  the  Treasury,  is  hereby  authorized  to  make  such  regulations 
from  time  to  time  as  may  be  necessary  to  give  force  and  effect  to  this  sec- 
tion and  to  safeguard  the  revenue. 

SEC.  309.  That  upon  all  still  wines,  including  vermuth,  and  upon  all 
champagne  and  other  sparkling  wines,  liqueurs,  cordials,  artificial  or  imita- 
Still Wines,  tion  wines  or  compounds  sold  as  wine,  produced  in  or  imported 
etc.  into  the  United  States,  and  hereafter  removed  from  the 

custom-house,  place  of  manufacture,  or  from  bonded  premises  for  sale  or 
consumption,  there  shall  be  levied  and  collected,  in  addition  to  the  tax  now 
imposed  by  law  upon  such  articles,  a  tax  equal  to  such  tax,  to  be  levied, 
collected,  and  paid  under  the  provisions  of  existing  law. 

SEC.  310.  That  upon  all  articles  specified  in  section  three  hundred  and 
nine  upon  which  the  tax  now  imposed  by  law  has  been  paid  and  which  are 
Excess  on  tne  day  this  Act  is  passed  held  in  excess  of  twenty-five 
Stock  Tax-  gallons  in  the  aggregate  of  such  articles  and  intended  for  sale, 
able.  there  shall  be  levied,  collected,  and  paid  a  tax  equal  to  the 

tax  imposed  by  such  section. 

SEC.  311.  That  upon  all  grape  brandy  or  wine  spirits  withdrawn  by  a 
producer  of  wines  from  any  fruit  distillery  or  special  bonded  warehouse 


WAR  TAX  ON  BEVERAGES  263 

under  subdivision  (c)  of  section  four  hundred  and  two  of  the  Act  entitled 
"An  Act  to  increase  the  revenue,  and  for  other  purposes,"   Grape 
approved  September  eighth,  nineteen  hundred  and  sixteen,   Brandy, 
there  shall  be  levied,  assessed,  collected,  and  paid  in  addition   etc. 
to  the  tax  therein  imposed,  a  tax  equal  to  double  such  tax,  to  be  assessed, 
collected,  and  paid  under  the  provisions  of  existing  law. 

SEC.  312.  That  upon  all  sweet  wines  held  for  sale  by  the  producer  thereof 
upon  the  day  this  Act  is  passed  there  shall  be  levied,  assessed,  collected, 
and  paid  an  additional  tax  equivalent  to  10  cents  per  proof   Sweet 
gallon  upon  the  grape  brandy  or  wine  spirits  used  in  the  for-   Wine. 
tification  of  such  wine,  and  an  additional  tax  of  20  cents  per  proof  gallon 
shall  be  levied,  assessed,  collected,  and  paid  upon  all  grape  brandy  or  wine 
spirits  withdrawn  by  a  producer  of  sweet  wines  for  the  purpose  of  fortifying 
such  wines  and  not  so  used  prior  to  the  passage  of  this  Act. 

SEC.  313.  That  there  shall  be  levied,  assessed,  collected,  and  paid — 

(a)  Upon  all  prepared  sirups  or  extracts  (intended  for  use  in  the  manu- 
facture or  production  of  beverages,  commonly  known  as  soft  drinks,  by 
soda  fountains,   bottling  establishments,  and  other  similar   Sirups,  Ex- 
places)    sold  by   the  manufacturer,   producer,   or  importer  tracts. 
thereof,  if  so  sold  for  not  more  than  $1.30  per  gallon,  a  tax  of  5  cents  per 
gallon;  if  so  sold  for  more  than  $1.30  and  not  more  than  $2  per  gallon,  a  tax 
of  8  cents  per  gallon;  if  so  sold  for  more  than  $2  and  not  more  than  $3  per 
gallon,  a  tax  of  10  cents  per  gallon;  if  so  sold  for  more  than  $3  and  not  more 
than  $4  per  gallon,  a  tax  of  15  cents  per  gallon;  and  if  so  sold  for  more  than 
$4  per  gallon,  a  tax  of  20  cents  per  gallon;  and 

(b)  Upon  all  unfermented  grape  juice,  soft  drinks,  or  artificial  mineral 
waters  (not  carbonated),  and  fermented  liquors  containing  less  than  one- 
half  per  centum  of  alcohol,  sold  by  the  manufacturer,  pro-   Soft 
ducer,  or  importer  thereof,  in  bottles  or  other  closed  containers  Drinks. 
and  upon  all  ginger  ale,  root  beer,  sarsaparilla,  pop,  and  other  carbonated 
waters  or  beverages,  manufactured  and  sold  by  the  manufacturer,  producer, 
or  importer  of  the  carbonic  acid  gas  used  in  carbonating  the  same,   a 
tax  of  i  cent  per  gallon;  and 

(c)  Upon  all  natural  mineral  waters  or  table  waters,  sold  by  the  pro- 
ducer, bottler,  or  importer  thereof,  in  bottles  or  other  closed  TH-  *  r 
containers,  at  over  10  cents  per  gallon,  a  tax  of  i  cent  per  gallon. 

SEC.  314.  That  each  such  manufacturer,  producer,  bottler,  or  importer 
shall  make  monthly  returns  under  oath  to  the  collector  of  internal  revenue 
for  the  district  in  which  is  located  the  principal  place  of  j>  ^m 
business,  containing  such  information  necessary  for  the  assess- 
ment of  the  tax,  and  at  such  times  and  hi  such  manner,  as  the  Commis- 
sioner of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the  Treas- 
ury, may  by  regulation  prescribe. 

SEC.  315.  That  upon  all  carbonic  acid  gas  in  drums  or  other  containers 
(intended  for  use  in  the  manufacture  or  production  of  carbonated  water 
or  other  drinks)  sold  by  the  manufacturer,  producer,  or  im-   Carbonic 
porter  thereof,  there  shall  be  levied,  assessed,  collected,  and   Acid  Gas 
paid  a  tax  of  5  cents  per  pound.    Such  tax  shall  be  paid  by  Tax. 


264  APPENDIX  B 

the  purchaser  to  the  vendor  thereof  and  shall  be  collected,  returned,  and 
paid  to  the  United  States  by  such  vendor  in  the  same  manner  as  provided 
in  section  five  hundred  and  three. 


TITLE  IV. — WAR  TAX  ON  CIGARS,  TOBACCO,  AND  MANUFACTURES  THEREOF 

SEC.  400.  That  upon  cigars  and  cigarettes,  which  shall  be  manufac- 
tured and  sold,  or  removed  for  consumption  or  sale,  there  shall  be  levied 
Cigars  and  and  collected,  in  addition  to  the  taxes  now  imposed  by  exist- 
Cigarettes.  ing  law,  the  following  taxes,  to  be  paid  by  the  manufacturer 
or  importer  thereof:  (a)  on  cigars  of  all  descriptions  made  of  tobacco,  or 
any  substitute  therefor,  and  weighing  not  more  than  three  pounds  per 
Rates  of  thousand,  25  cents  per  thousand;  (b)  on  cigars  made  of  to- 
Taxes.  bacco,  or  any  substitute  therefor,  and  weighing  more  than 

three  pounds  per  thousand,  if  manufactured  or  imported  to  retail  at  4  cents 
or  more  each,  and  not  more  than  7  cents  each,  $i  per  thousand;  (c)  if  manu- 
factured or  imported  to  retail  at  more  than  7  cents  each  and  not  more  than 
15  cents  each,  $3  per  thousand;  (d)  if  manufactured  or  imported  to  retail 
at  more  than  15  cents  each  and  not  more  than  20  cents  each,  $5  per  thousand; 
(e)  if  manufactured  or  imported  to  retail  at  more  than  20  cents  each,  $7  per 
thousand:  Provided,  That  the  word  "retail"  as  used  in  this  section  shall 
"  Retail  "  mean  the  ordinary  retail  price  of  a  single  cigar,  and  that  the 
Defined.  Commissioner  of  Internal  Revenue  may,  by  regulation,  require 
the  manufacturer  or  importer  to  affix  to  each  box  or  container  a  conspicuous 
label  indicating  by  letter  the  clause  of  this  section  under  which  the  cigars 
therein  contained  have  been  tax-paid,  which  must  correspond  with  the 
tax-paid  stamp  on  said  box  or  container;  (f)  on  cigarettes  made  of  tobacco, 
Cigarettes  or  any  substitute  therefor,  made  in  or  imported  into  the 
Tax.  United  States,  and  weighing  not  more  than  three  pounds  per 

thousand,  80  cents  per  thousand;  weighing  more  than  three  pounds  per 
thousand,  $1.20  per  thousand. 

Every  manufacturer  of  cigarettes  (including  small  cigars  weighing  not 
more  than  three  pounds  per  thousand)  shall  put  up  all  the  cigarettes  and 
Packages  such  small  cigars  that  he  manufactures  or  has  manufac- 
of  Ciga-  tured  for  him,  and  sells  or  removes  for  consumption  or  use, 
rettes.  in  packages  or  parcels  containing  five,  eight,  ten,  twelve, 

fifteen,  sixteen,  twenty,  twenty-four,  forty,  fifty,  eighty,  or  one  hundred 
cigarettes  each,  and  shall  securely  affix  to  each  of  said  packages  or  parcels  a 
Use  of  suitable  stamp  denoting  the  tax  thereon  and  shall  properly 

Stamps.  cancel  the  same  prior  to  such  sale  or  removal  for  consumption 
or  use  under  such  regulations  as  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  shall  prescribe;  and 
all  cigarettes  imported  from  a  foreign  country  shall  be  packed,  stamped, 
Imported  and  the  stamps  canceled  in  a  like  manner,  in  addition  to 
Cigarettes,  the  import  stamp  indicating  inspection  of  the  custom-house 
before  they  are  withdrawn  therefrom. 

SEC.  401.  That  upon  all  tobacco  and  snuff  hereafter  manufactured  and 


WAR  TAX  ON  CIGARS  AND  TOBACCO  265 

sold,  or  removed  for  consumption  or  use,  there  shall  be  levied  Tobacco 
and  collected,  in  addition  to  the  tax  now  imposed  by  law   and  Snuff 
upon  such  articles,  a  tax  of  5  cents  per  pound,  to  be  levied,   Tax. 
collected,  and  paid  under  the  provisions  of  existing  law. 

In  addition  to  the  packages  provided  for  under  existing  law,  manufac- 
tured tobacco  and  snuff  may  be  put  up  and  prepared  by  the  manufacturer 
for  sale  or  consumption,  in  packages  of  the  following  descrip-  Additional 
tion:    Packages    containing    one-eighth,    three-eighths,    five-  Packages. 
eighths,  seven-eighths,  one  and  one-eighth,  one  and  three-eighths,  one  and 
five-eighths,  one  and  seven-eighths,  and  five  ounces. 

SEC.  402.  That  sections  four  hundred,  four  hundred  and  one,  and  four 
hundred  and  four,  shall  take  effect  thirty  days  after  the  passage  of  this 
Act:  Provided,  That  after  the  passage  of  this  Act  and  before  When  Ef- 
the  expiration  of  the  aforesaid  thirty  days,  cigarettes  and  fective. 
manufactured  tobacco  and  snuff  may  be  put  up  in  the  packages  now  pro- 
vided for  by  law  or  in  the  packages  provided  for  in  sections  four  hundred 
and  four  hundred  and  one. 

SEC.  403.  That  there  shall  also  be  levied  and  collected,  upon  all  manu- 
factured tobacco  and  snuff  in  excess  of  one  hundred  pounds  or  upon  cigars 
or  cigarettes  in  excess  of  one  thousand,  which  were  manufac-  Excess 
tured  or  imported,  and  removed  from  factory  or  custom-   Quantity, 
house  prior  to  the  passage  of  this  Act,  bearing  tax-paid  stamps  affixed  to 
such  articles  for  the  payment  of  the  taxes  thereon,  and  which  are,  on  the 
day  after  this  Act  is  passed,  held  and  intended  for  sale  by  any  person,  cor- 
poration, partnership,  or  association,  and  upon  all  manufactured  tobacco, 
snuff,  cigars,  or  cigarettes,  removed  from  factory  or  customs  house  after 
the  passage  of  this  Act  but  prior  to  the  time  when  the  tax  Rate  of 
imposed  by  section  four  hundred  or  section  four  hundred  and  Tax. 
one  upon  such  articles  takes  effect,  an  additional  tax  equal  to  one-half  the 
tax  imposed  by  such  sections  upon  such  articles. 

SEC.  404.  That  there  shall  be  levied,  assessed,  and  collected  upon  cig- 
arette paper  made  up  into  packages,  books,  sets,  or  tubes,  made  up  in 
or  imported  into  the  United  States  and  intended  for  use   Cigarette 
by  the  smoker  in  making  cigarettes  the  following  taxes:  On   Paper,  etc. 
each  package,  book,  or  set,  containing  more  than  twenty-five  but  not  more 
than  fifty  papers,  one-half  of  i  cent;  containing  more  than  fifty  but  not 
more  than  one  hundred  papers,  i  cent;  containing  more  than   Rate  of 
one  hundred  papers,  i  cent  for  each  one  hundred  papers  or  Tax. 
fractional  part  thereof;  and  upon  tubes,  2  cents  for  each  one  hundred  tubes 
or  fractional  part  thereof. 

TITLE  V.— WAR  TAX  ON  FACILITIES  FURNISHED  By  PUBLIC  UTILITIES,  AND 

INSURANCE 

SEC.  500.  That  from  and  after  the  first  day  of  November,  nineteen 
hundred  and  seventeen,  there  shall  be  levied,  assessed,  collected,  and  paid 
(a)  a  tax  equivalent  to  three  per  centum  of  the  amount  paid   Transpor- 
ter the  transportation  by  rail  or  water  or  by  any  form  of  tation 


266  APPENDIX  B 

mechanical  motor  power  when  in  competition  with  carriers  by  rail  or  water 
F  'eht  °*  Pr°Pertv  ty  freignt  consigned  from  one  point  in  the  United 
States  to  another;  (b)  a  tax  of  i  cent  for  each  20  cents,  or 
fraction  thereof,  paid  to  any  person,  corporation,  partnership,  or  associa- 
Rate  of  tion,  engaged  in  the  business  of  transporting  parcels  or  pack- 
Tax,  ages  by  express  over  regular  routes  between  fixed  terminals, 
for  the  transportation  of  any  package,  parcel,  or  shipment  by  express  from 
Express-  one  point  in  the  United  States  to  another:  Provided,  That 
age.  nothing  herein  contained  shall  be  construed  to  require  the 
carrier  collecting  such  tax  to  list  separately  in  any  bill  of  lading,  freight 
receipt,  or  other  similar  document,  the  amount  of  the  tax  herein  levied, 
if  the  total  amount  of  the  freight  and  tax  be  therein  stated;  (c)  a  tax  equiva- 
Rateof  lent  to  eight  per  centum  of  the  amount  paid  for  the  trans- 
Tax,  portation  of  persons  by  rail  or  water,  or  by  any  form  of  me- 
chanical motor  power  on  a  regular  established  line  when  in  competition 
with  carriers  by  rail  or  water,  from  one  point  in  the  United  States  to  another 
or  to  any  point  in  Canada  or  Mexico,  where  the  ticket  therefor  is  sold  or 
issued  in  the  United  States,  not  including  the  amount  paid  for  commutation 
Passen-  or  season  tickets  for  trips  less  than  thirty  miles,  or  for  trans- 
gers,  Rate  portation  the  fare  for  which  does  not  exceed  35  cents,  and  a 
of  Tax.  tax  equivalent  to  ten  per  centum  of  the  amount  paid  for 
seats,  berths,  and  staterooms  in  parlor  cars,  sleeping  cars,  or  on  vessels. 
If  a  mileage  book  used  for  such  transportation  or  accommodation  has  been 
purchased  before  this  section  takes  effect,  or  if  cash  fare  be  paid,  the  tax 
imposed  by  this  section  shall  be  collected  from  the  person  presenting  the 
Mileage  mileage  book,  or  paying  the  cash  fare,  by  the  conductor  or 
other  agent,  when  presented  for  such  transportation  or  ac- 
commodation, and  the  amount  so  collected  shall  be  paid  to  the  United 
States  in  such  manner  and  at  such  times  as  the  Commissioner  of  Internal 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury,  may  prescribe; 
if  a  ticket  (other  than  a  mileage  book)  is  bought  and  partially  used  before 
this  section  goes  into  effect  it  shall  not  be  taxed,  but  if  bought  but  not  so 
used  before  this  section  takes  effect,  it  shall  not  be  valid  for  passage  until 
the  tax  has  been  paid  and  such  payment  evidenced  on  the  ticket  in  such 
manner  as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  of  the  Treasury,  may  by  regulation  prescribe;  (d)  a  tax  equiva- 
lent to  five  per  centum  of  the  amount  paid  for  the  transportation  of  oil 
Pipe  Line  by  pipe  line;  (e)  a  tax  of  5  cents  upon  each  telegraph,  tele- 
Rate,  phone,  or  radio,  dispatch,  message,  or  conversation,  which 
originates  within  the  United  States,  and  for  the  transmission  of  which  a 
charge  of  15  cents  or  more  is  imposed:  Provided,  That  only  one  payment  of 
such  tax  shall  be  required,  notwithstanding  the  lines  or  stations  of  one  or 
more  persons,  corporations,  partnerships,  or  associations  shall  be  used  for 
the  transmission  of  such  dispatch,  message,  or  conversation. 

SEC.  501.  That  the  taxes  imposed  by  section  five  hundred  shall  be  paid 
Who  Pays  by  the  person,  corporation,  partnership,  or  association  paying 
Tax.  for  the  services  or  facilities  rendered. 

In  case  such  carrier  does  not,  because  of  its  ownership  of  the  commodity 


WAR  TAX   ON  PUBLIC  UTILITIES  267 

transported,  or  for  any  other  reason,  receive  the  amount  which  as  a  carrier 
it  would  otherwise  charge,  such  carrier  shall  pay  a  tax  equiva-   Ownership 
lent  to  the  tax  which  would  be  imposed  upon  the  transporta-   of  Com- 
tion  of  such  commodity  if  the  carrier  received  payment  for   modities. 
such  transportation:  Provided,  That  in  case  of  a  carrier  which  on  May  first, 
nineteen  hundred  and  seventeen,  had  no  rates  or  tariffs  on  file  with  the 
proper  Federal  or  State  authority,  the  tax  shall  be  computed   •parjgs 
on  the  basis  of  the  rates  or  tariffs  of  other  carriers  for  like 
services  as  ascertained  and  determined  by  the  Commissioner  of  Internal 
Revenue:  Provided  further,  That  nothing  in  this  or  the  preceding  section 
shall  be  construed  as  imposing  a  tax  (a)  upon  the  transportation   When   Tax 
of  any  commodity  which  is  necessary  for  the  use  of  the  carrier  not  Appli- 
in  the  conduct  of  its  business  as  such  and  is  intended  to  be   cable, 
so  used  or  has  been  so  used;  or  (b)  upon  the  transportation  of  company 
material  transported  by  one  carrier,  which  constitutes  a  part  of  a  railroad 
system,  for  another  carrier  which  is  also  a  part  of  the  same  system. 

SEC.  502.  That  no  tax  shall  be  imposed  under  section  five  hundred  upon 
any  payment  received  for  services  rendered  to  the  United  States,  or  any 
State,  Territory,  or  the  District  of  Columbia.    The  right  to  Exemp- 
exemption  under  this  section  shall  be  evidenced  in  such  man-   tion. 
ner  as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  may  by  regulation  prescribe. 

SEC.  503.  That  each  person,  corporation,  partnership,  or  association 
receiving  any  payments  referred  to  in  section  five  hundred  shall  collect 
the  amount  of  the  tax,  if  any,  imposed  by  such  section  from  Monthly 
the  person,  corporation,  partnership,  or  association  making  Returns, 
such  payments,  and  shall  make  monthly  returns  under  oath,  hi  duplicate, 
and  pay  the  taxes  so  collected  and  the  taxes  imposed  upon  it  under  para- 
graph two  of  section  five  hundred  and  one  to  the  collector  of  internal  revenue 
of  the  district  in  which  the  principal  office  or  place  of  business  is  located. 
Such  returns  shall  contain  such  information,  and  be  made  in  such  manner, 
as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the  Secre- 
tary of  the  Treasury,  may  by  regulation  prescribe. 

SEC.  504.  That  from  and  after  the  first  day  of  November,  nineteen  hun- 
dred and  seventeen,  there  shall  be  levied,  assessed,  collected,   WhenEf- 
and  paid  the  following  taxes  on  the  issuance  of  insurance  fective. 
policies: 

(a)  Life  insurance:  A  tax  equivalent  to  8  cents  on  each  $100  or  fractional 
part  thereof  of  the  amount  for  which  any  life  is  insured  under  any  policy 
of  insurance,  or  other  instrument,  by  whatever  name  the  same   Life  In- 

is  called:  Provided,  That  on  all  policies  for  life  insurance  only  surance. 
by  which  a  life  is  insured  not  in  excess  of  $500,  issued  on  the  industrial  or 
weekly-payment  plan  of  insurance,  the  tax  shall  be  forty  per  centum 
of  the  amount  of  the  first  weekly  premium:  Provided  further,  That  poli- 
cies of  reinsurance  shall  be  exempt  from  the  tax  imposed  by  this  subdivi- 
sion; 

(b)  Marine,  inland,  and  fire  insurance:  A  tax  equivalent  to  i  cent  on  each 
dollar  or  fractional  part  thereof  of  the  premium  charged  under  each  policy 


268  APPENDIX  B 

of  insurance  or  other  instrument  by  whatever  name  the  same  is  called 
Marine,In-  whereby  insurance  is  made  or  renewed  upon  property  of  any  de- 
land  Fire  scription  (including  rents  or  profits),  whether  against  peril  by 
Insurance,  sea  or  inland  waters,  or  by  fire  or  lightning,  or  other  peril:  Pro- 
vided, That  policies  of  reinsurance  shall  be  exempt  from  the  tax  imposed  by 
this  subdivision; 

(c)  Casualty  insurance:  A  tax  equivalent  to  i  cent  on  each  dollar  or 
fractional  part  thereof  of  the  premium  charged  under  each  policy  of  insur- 
Casualty        ance  or  obligation  of  the  nature  of  indemnity  for  loss,  damage. 
Insurance,    or  liability  (except  bonds  taxable  under  subdivision  two  of 
schedule  A  of  Title  VIII)  issued  or  executed  or  renewed  by  any  person,  cor- 
poration, partnership,  or  association,  transacting  the  business  of  employ- 
ers' liability,  workmen's  compensation,  accident,  health,  tornado,  plate 
glass,  steam  boiler,  elevator,  burglary,  automatic  sprinkler,  automobile, 
or  other  branch  of  insurance  (except  life  insurance,  and  insurance  described 
and  taxed  in  the  preceding  subdivision) :  Provided,  That  policies  of  reinsur- 
ance shall  be  exempt  from  the  tax  imposed  by  this  subdivision; 

(d)  Policies  issued  by  any  person,  corporation,  partnership,  or  association, 
Exempt         whose  income  is  exempt  from  taxation  under  Title  I  of  the 
Organiza-     Act  entitled  "An  Act  to  increase  the  revenue,  and  for  other 
tions.  purposes,"   approved   September   eighth,   nineteen   hundred 
and  sixteen,  shall  be  exempt  from  the  taxes  imposed  by  this  section. 

SEC.  505.  That  every  person,  corporation,  partnership,  or  association, 
issuing  policies  of  insurance  upon  the  issuance  of  which  a  tax  is  imposed 
Monthly  by  section  five  hundred  and  four,  shall,  within  the  first  fifteen 
Returns.  days  of  each  month,  make  a  return  under  oath,  in  duplicate, 
and  pay  such  tax  to  the  collector  of  internal  revenue  of  the  district  in  which 
the  principal  office  or  place  of  business  of  such  person,  corporation,  partner- 
ship, or  association  is  located.  Such  returns  shall  contain  such  information 
and  be  made  in  such  manner  as  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury,  may  by  regulation  prescribe. 

TITLE  VI.— WAR  EXCISE  TAXES 

Automo-  SEC.  600.  That  there  shall  be  levied,  assessed,  collected,  and 

biles,  Auto  paid- 
Trucks,  (a)  Upon  all  automobiles,  automobile  trucks,  automobile 
Motor-          wagons,  and  motorcycles,  sold  by  the  manufacturer,  producer, 
cycles.           or  importer,  a  tax  equivalent  to  three  per  centum  of  the  price 
for  which  so  sold;  and 

(b)  Upon  all  piano  players,  graphophones,  phonographs,  talking  machines, 
Piano  and  records  used  in   connection  with  any  musical  instru- 
PlayerSi         ment,  piano  player,  graphophone,  phonograph,   or  talking 
Phono-          machine,  sold  by  the  manufacturer,  producer,  or  importer, 
graphs.          a  tax  equivalent  to  three  per  centum  of  the  price  for  which 
so  sold;  and 

(c)  Upon  all  moving-picture  films  (which  have  not  been  exposed)  sold 
Films  ky  t*16  manufacturer  or  importer  a  tax  equivalent  to  one-fourth 

of  i  cent  per  linear  foot;  and 


WAR  EXCISE   TAXES  269 

(d)  Upon  all  positive  moving-picture  films  (containing  a  picture  ready  for 
projection)  sold  or  leased  by  the  manufacturer,  producer,  or  importer,  a 
tax  equivalent  to  one-half  of  i  cent  per  linear  foot;  and 

(e)  Upon  any  article   commonly  or  commercially  known  as  jewelry, 
whether  real  or  imitation,  sold  by  the  manufacturer,  producer,    j       . 

or  importer  thereof,  a  tax  equivalent  to  three  per  centum  of  ^ 
the  price  for  which  so  sold;  and 

(f)  Upon  all  tennis  rackets,  golf  clubs,  baseball  bats,  lacrosse  sticks, 
balls  of  all  kinds,  including  baseballs,  foot  balls,  tennis,  golf,   Sporting 
lacrosse,  billiard  and  pool  balls,  fishing  rods  and  reels,  billiard   Goods 

and  pool  tables,  chess  and  checker  boards  and  pieces,  dice,  games  and  parts 


of  games,  except  playing  cards  and  children's  toys  and  games, 


Toys. 


sold  by  the  manufacturer,  producer,  or  importer,  a  tax  equiv- 
alent to  three  per  centum  of  the  price  for  which  so  sold;  and 

(g)  Upon  all  perfumes,  essences,  extracts,  toilet  waters,  cosmetics,  pe- 
troleum jellies,  hair  oils,  pomades,  hair  dressings,  hair  restoratives,  hair- 
dyes,  tooth  and  mouth  washes,  dentifrices,  tooth  pastes,  aro-   Perfumes, 
matic  cachous,  toilet  soaps  and  powders,  or  any  similar  sub-  Toilet  Ar- 
stance,  article,  or  preparation  by  whatsoever  name  known  or  tides. 
distinguished,  upon  all  of  the  above  which  are  used  or  applied  or  intended 
to  be  used  or  applied  for  toilet  purposes,  and  which  are  sold  by  the  manu- 
facturer, importer,  or  producer,  a  tax  equivalent  to  two  per  centum  of  the 
price  for  which  so  sold;  and 

(h)  Upon  all  pills,  tablets,  powders,  tinctures,  troches  or  lozenges,  sirups, 
medicinal  cordials  or  bitters,  anodynes,  tonics,  plasters,  liniments,  salves, 
ointments,  pastes,  drops,  waters  (except  those  taxed  under  sec-  Proprietary 
tion  three  hundred  and  thirteen  of  this  Act),  essences,  spirits,  Medicines. 
oils,  and  all  medicinal  preparations,  compounds,  or  compositions  whatso- 
ever, the  manufacturer  or  producer  of  which  claims  to  have  any  private 
formula,  secret,  or  occult  art  for  making  or  preparing  the  same,  or  has  or 
claims  to  have  any  exclusive  right  or  title  to  the  making  or  preparing  the 
same,  or  which  are  prepared,  uttered,  vended,  or  exposed  for  sale  under 
any  letters  patent,  or  trade-mark,  or  which,  if  prepared  by  any  formula, 
published  or  unpublished,  are  held  out  or  recommended  to  the  public  by 
the  makers,  venders,  or  proprietors  thereof  as  proprietary  medicines  or 
medicinal  proprietary  articles  or  preparations,  or  as  remedies  Rate  of 
or  specifics  for  any  disease,  diseases,  or  affection  whatever  Tax. 
affecting  the  human  or  animal  body,  and  which  are  sold  by  the  manufacturer, 
producer,  or  importer,  a  tax  equivalent  to  two  per  centum  of  the  price  for 
which  so  sold;  and 

(i)  Upon  all  chewing  gum  or  substitute  therefor  sold  by  the  manufacturer, 
producer,  or  importer,  a  tax  equivalent  to  two  per  centum   Chewing 
of  the  price  for  which  so  sold;  and  Gum. 

(j)  Upon  all  cameras  sold  by  the  manufacturer,  producer,  or  importer, 
a  tax  equivalent  to  three  per  centum  of  the  price  for  which   ~ 
so  sold.  Cameras. 

SEC.  601.  That  each  manufacturer,  producer,  or  importer  of  any  of  the 
articles  enumerated  in  section  six  hundred  shall  make  monthly  returns 


270  APPENDIX  B 

under  oath  in  duplicate  and  pay  the  taxes  imposed  on  such  articles  by 
Monthly  this  title  to  the  collector  of  internal  revenue  for  the  district  in 
Returns.  which  is  located  the  principal  place  of  business.  Such  returns 
shall  contain  such  information  and  be  made  at  such  times  and  in  such  man- 
ner as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  may  by  regulations  prescribe. 

SEC.  602.  That  upon  all  articles  enumerated  in  subdivisions  (a),  (b), 
(e),  (f)-,  (g),  (h),  (i),  or  (j)  of  section  six  hundred,  which  on  the  day  this 

Floor  Tax  ^ct  *s  Passe(^  are  ^e^  an<^  mtended  for  sale  by  any  person, 
corporation,  partnership,  or  association,  other  than  (i)  a  re- 
tailer who  is  not  also  a  wholesaler,  or  (2)  the  manufacturer,  producer,  or 
importer  thereof,  there  shall  be  levied,  assessed,  collected,  and  paid  a  tax 
equivalent  to  one-half  the  tax  imposed  by  each  such  subdivision  upon  the 
sale  of  the  articles  therein  enumerated.  This  tax  shall  be  paid  by  the  per- 
son, corporation,  partnership,  or  association  so  holding  such  articles. 

The  taxes  imposed  by  this  section  shall  be  assessed,  collected,  and  paid 
in  the  same  manner  as  provided  in  section  ten  hundred  and  two  in  the  case 
of  additional  taxes  upon  articles  upon  which  the  tax  imposed  by  existing 
law  has  been  paid. 

Nothing  in  this  section  shall  be  construed  to  impose  a  tax  upon  articles 
Limitation  so^  anc*  delivered  Pr^or  to  May  ninth,  nineteen  hundred  and 
seventeen,  where  the  title  is  reserved  in  the  vendor  as  security 
for  the  payment  of  the  purchase  money. 

SEC.  603.  That  on  the  day  this  Act  takes  effect,  and  thereafter  on  July 
first  in  each  year,  and  also  at  the  time  of  the  original  purchase  of  a  new 

Yachts  k°at  ky  a  user>  ^  on  any  ot^er  date  t^lan  Ju^  ^rst'  t^616  sna^ 
be  levied,  assessed,  collected,  and  paid  upon  the  use  of  yachts, 
pleasure  boats,  power  boats,  and  sailing  boats,  of  over  five  net  tons,  and 
motor  boats  with  fixed  engines,  not  used  exclusively  for  trade  or  national 
defense,  or  not  built  according  to  plans  and  specifications  approved  by  the 
Pleasure  Navy  Department,  an  excise  tax  to  be  based  on  each  yacht 
Boats.  or  boat,  at  rates  as  follows:  Yachts,  pleasure  boats,  power 

boats,  motor  boats  with  fixed  engines,  and  sailing  boats,  of  over  five  net 
tons,  length  not  over  fifty  feet,  50  cents  for  each  foot,  length  over  fifty  feet 
Rate  of  and  not  over  one  hundred  feet,  $i  for  each  foot,  length  over 
Tax.  one  hundred  feet,  $2  for  each  foot;  motor  boats  of  not  over 

five  net  tons  with  fixed  engines,  $5. 

In  determining  the  length  of  such  yachts,  pleasure  boats,  power  boats, 
Detennin-  motor  boats  with  fixed  engines,  and  sailing  boats,  the  measure- 
ing  Length,  ment  of  over-all  length  shall  govern. 

In  the  case  of  a  tax  imposed  at  the  time  of  the  original  purchase  of  a 
Apportion-  n^w  boat  on  any  other  date  than  July  first,  the  amount  to  be 
ment  of  paid  shall  be  the  same  number  of  twelfths  of  the  amount  of 
Tax.  the  tax  as  the  number  of  calendar  months,  including  the 

month  of  sale,  remaining  prior  to  the  following  July  first. 

TITLE  VII. — WAR  TAX  ON  ADMISSIONS  AND  DUES 
SEC.  700.  That  from  and  after  the  first  day  of  November,  nineteen 


WAR  TAX   ON  ADMISSIONS   AND   DUES  271 

hundred  and  seventeen,  there  shall  be  levied,  assessed,  collected,  and  paid 
(a)  a  tax  of  i  cent  for  each  10  cents  or  fraction  thereof  of 
the  amount  paid  for  admission  to  any  place,  including  ad- 
mission by  season  ticket  or  subscription,  to  be  paid  by  the  person  paying 
for  such  admission :  Provided,  That  the  tax  on  admission  of   Rate  of 
children  under  twelve  years  of  age  where  an  admission  charge   Tax. 
for  such  children  is  made  shall  in  every  case  be  i  cent;  and  (b)  in  the  case  of 
persons  (except  bona  fide  employees,  municipal  officers  on  official  business, 
and  children  under  twelve  years  of  age)  admitted  free  to  any  place  at  a 
time  when  and  under  circumstances  under  which  an  admission  charge  is 
made  to  other  persons  of  the  same  class,  a  tax  of  i  cent  for  each  10  cents 
or  fraction  thereof  of  the  price  so  charged  to  such  other  persons  for  the 
same  or  similar  accommodations,  to  be  paid  by  the  person  so  admitted; 
and  (c)  a  tax  of  i  cent  for  each  10  cents  or  fraction  thereof  paid  for  admis- 
sion to  any  public  performance  for  profit  at  any  cabaret  or 
other  similar  entertainment  to  which  the  charge  for  admis- 
sion is  wholly  or  in  part  included  in  the  price  paid  for  refreshment,  service, 
or  merchandise;  the  amount  paid  for  such  admission  to  be  computed  under 
rules  prescribed  by  the  Commissioner  of  Internal  Revenue,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury,  such  tax  to  be  paid  by  the  person 
paying  for  such  refreshment,  service,  or  merchandise.    In  the  case  of  per- 
sons having  the  permanent  use  of  boxes  or  seats  in  an  opera  house  or  any 
place  of  amusement  or  a  lease  for  the  use  of  such  box  or  seat  Leased 
in  such  opera  house  or  place  of  amusement  there  shall  be  Boxes   and 
levied,  assessed,  collected,  and  paid  a  tax  equivalent  to  ten   Seats, 
per  centum  of  the  amount  for  which  a  similar  box  or  seat  is  sold  for  per- 
formance or  exhibition  at  which  the  box  or  seat  is  used  or  reserved  by  or 
for  the  lessee  or  holder.    These  taxes  shall  not  be  imposed  in  the  case  of 
a  place  the  maximum  charge  for  admission  to  which  is  5  cents,   Tax  not 
or  in  the  case  of  shows,  rides,  and  other  amusements,  (the  Imposed. 
maximum  charge  for  admission  to  which  is  10  cents)  within  outdoor  general 
amusement  parks,  or  in  the  case  of  admissions  to  such  parks. 

No  tax  shall  be  levied  under  this  title  in  respect  to  any  Exemp- 
admissions  all  the  proceeds  of  which  inure  exclusively  to  tionsRe- 
the  benefit  of  religious,  educational,  or  charitable  institu-   ligious, 
tions,  societies,  or  organizations,  or  admissions  to  agricul-  Educa- 
tural  fairs  none  of  the  profits  of  which  are  distributed  to 
stockholders  or  members  of  the  association  conducting  the 

The  term  "admission"  as  used  in  this  title  includes  seats  "  Admis- 
and  tables,  reserved  or  otherwise,  and  other  similar  accom-  l*on." 
modations,  and  the  charges  made  therefor.  nnea. 

SEC.  701.  That  from  and  after  the  first  day  of  November,  nineteen  hun- 
dred and  seventeen,  there  shall  be  levied,  assessed,  collected,  and  paid, 
a  tax  equivalent  to  ten  per  centum  of  any  amount  paid  as   Club  Dues, 
dues  or  membership  fees  (including  initiation  fees),  to  any   Member- 
social,  athletic,  or  sporting  club  or  organization,  where  such   ship  Fees. 
dues  or  fees  are  in  excess  of  $12  per  year;  such  taxes  to  be  paid  by  the  person 


272  APPENDIX  B 

paying  such  dues  or  fees:  Provided,  That  there  shall  be  exempted  from  the 
provisions  of  this  section  all  amounts  paid  as  dues  or  fees  to  a  fraternal 
beneficiary  society,  order,  or  association,  operating  under  the  lodge  system 
Exemp-  or  for  the  exclusive  benefit  of  the  members  of  a  fraternity 
tion.  itself  operating  under  the  lodge  system,  and  providing  for 

the  payment  of  life,  sick,  accident,  or  other  benefits  to  the  members  of  such 
society,  order,  or  association  or  their  dependents. 

SEC.  702.  That  every  person,  corporation,  partnership,  or  association 
(a)  receiving  any  payments  for  such  admission,  dues,  or  fees,  shall  collect 
Returns  the  amount  of  the  tax  imposed  by  section  seven  hundred  or 
Required,  seven  hundred  and  one  from  the  person  making  such  pay- 
ments, or  (b)  admitting  any  person  free  to  any  place  for  admission  to  which 
a  charge  is  made  shall  collect  the  amount  of  the  tax  imposed  by  section  seven 
hundred  and  from  the  person  so  admitted,  and  (c)  in  either  case  shall  make 
returns  and  payments  of  the  amount  so  collected,  at  the  same  time  and  in 
the  same  manner  as  provided  in  section  five  hundred  and  three  of  this  Act. 

TITLE  VIII.— WAR  STAMP  TAXES 

SEC.  800.  That  on  and  after  the  first  day  of  December,  nineteen  hundred 
and  seventeen,  there  shall  be  levied,  collected,  and  paid,  for  and  in  respect 
Stamp  °f  the  several  bonds,  debentures,  or  certificates  of  stock  and 

Taxes  of  indebtedness,  and  other  documents,  instruments,  matters, 

WhenEf-  and  things  mentioned  and  described  in  Schedule  A  of  this 
fective.  title,  or  for  or  in  respect  of  the  vellum,  parchment,  or  paper 
upon  which  such  instruments,  matters,  or  things,  or  any  of  them,  are  written 
or  printed,  by  any  person,  corporation,  partnership,  or  association  who 
makes,  signs,  issues,  sells,  removes,  consigns,  or  ships  the  same,  or  for  whose 
use  or  benefit  the  same  are  made,  signed,  issued,  sold,  removed,  consigned, 
or  shipped,  the  several  taxes  specified  in  such  schedule. 

SEC.  801.  That  there  shall  not  be  taxed  under  this  title  any  bond,  note, 
or  other  instrument,  issued  by  the  United  States,  or  by  any  foreign  Govern- 
Exemp-  ment,  or  by  any  State,  Territory  or  the  District  of  Columbia, 
tions.  or  local  subdivision  thereof,  or  municipal  or  other  corporation 

exercising  the  taxing  power,  when  issued  in  the  exercise  of  a  strictly  govern- 
mental, taxing,  or  municipal  function;  or  stocks  and  bonds  issued  by  co- 
operative building  and  loan  associations  which  are  organized  and  operated 
exclusively  for  the  benefit  of  their  members  and  make  loans  only  to  their 
shareholders,  or  by  mutual  ditch  or  irrigating  companies. 

SEC.  802.  That  whoever — 

(a)  Makes,  signs,  issues,  or  accepts,  or  causes  to  be  made,  signed,  issued, 
Insufficient  or  accepted,  any  instrument,  document,  or  paper  of  any 
Amount   of  kind  or  description  whatsoever  without  the  full  amount  of 
Stamps.         tax  thereon  being  duly  paid; 

(b)  Consigns  or  ships,  or  causes  to  be  consigned  or  shipped,  by  parcel 
post  any  parcel,  package,  or  article  without  the  full  amount  of  tax  being 
duly  paid; 

(c)  Manufactures  or  imports  and  sells,  or  offers  for  sale,  or  causes  to  be 


WAR   STAMP  TAXES  273 

manufactured  or  imported  and  sold,  or  offered  for  sale,  any  playing  cards, 
package,  or  other  article  without  the  full  amount  of  tax  being  duly  paid; 

(d)  Makes  use  of  any  adhesive  stamp  to  denote  any  tax  imposed  by 
this  title  without  canceling  or  obliterating  such  stamp  as  pay^e  to 
prescribed  in  section  eight  hundred  and  four;  Cancel. 

Is  guilty  of  a  misdemeanor  and  upon  conviction  thereof   _       . 
shall  pay  a  fine  of  not  more  than  $100  for  each  offense.  Penalty. 

SEC.  803.  That  whoever— 

(a)  Fraudulently  cuts,  tears,  or  removes  from  any  vellum,  parchment, 
paper,  instrument,  writing,  package,  or  article,  upon  which  any  tax  is  im- 
posed by  this  title,  any  adhesive  stamp  or  the  impression  of  Removing 
any  stamp,  die,  plate,  or  other  article  provided,  made,  or  Stamps, 
used  in  pursuance  of  this  title; 

(b)  Fraudulently  uses,  joins,  fixes,  or  places  to,  with,  or  upon  any  vellum, 
parchment,  paper,  instrument,  writing,  package,  or  article,  upon  which 
any  tax  is  imposed  by  this  title,  (i)  any  adhesive  stamp,  or  Fraud- 
the  impression  of  any  stamp,  die,  plate,  or  other  article,  which  ulent  Use 
has  been  cut,  torn,  or  removed  from  any  other  vellum,  parch-  of  Stamps, 
ment,  paper,  instrument,  writing,  package,  or  article,  upon  which  any  tax 
is  imposed  by  this  title;  or  (2)  any  adhesive  stamp  or  the  impression  of 
any  stamp,  die,  plate,  or  other  article  of  insufficient  value;  or  (3)  any  forged 
or  counterfeit  stamp,  or  the  impression  of  any  forged  or  counterfeited  stamp, 
die,  plate,  or  other  article; 

(c)  Willfully  removes,  or  alters  the  cancellation,  or  defacing  marks  of, 
or  otherwise  prepares,  any  adhesive  stamp,  with  intent  to  use,  or  cause 
the  same  to  be  used,  after  it  has  been  already  used,  or  know-  Removes 
ingly  or  Willfully  buys,  sells,  offers  for  sale,  or  gives  away,  any  Stamps, 
such  washed  or  restored  stamp  to  any  person  for  use,  or  knowingly  uses  the 
same; 

(d)  Knowingly  and  without  lawful  excuse  (the  burden  of  proof  of  such 
excuse  being  on  the  accused)  has  in  possession  any  washed,   In  Posses- 
restored,  or  altered  stamp,  which  has  been  removed  from   sion  of 
any  vellum,  parchment,  paper,  instrument,  writing,  package,  Washed 

or  article,  is  guilty  of  a  misdemeanor,  and  upon  conviction   Stamps, 
shall  be  punished  by  a  fine  of  not  more  than  $1,000,  or  by  imprisonment  for 
not  more  than  five  years,  or  both,  in  the  discretion  of  the  p       .. 
court,  and  any  such  reused,  canceled,  or  counterfeit  stamp 
and  the  vellum,  parchment,  document,  paper,  package,  or  article  upon 
which  it  is  placed  or  impressed  shall  be  forfeited  to  the  United  States. 

SEC.  804.  That  whenever  an  adhesive  stamp  is  used  for  denoting  any 
tax  imposed  by  this  title,  except  as  hereinafter  provided,  the  person,  cor- 
poration, partnership,  or  association,  using  or  affixing  the  Prescribed 
same  shall  write  or  stamp  or  cause  to  be  written  or  stamped   Method   of 
thereupon  the  initials  of  his  or  its  name  and  the  date  upon   Cancella- 
which  the  same  is  attached  or  used,  so  that  the  same  may  not  tion. 
again  be  used:  Provided,  That  the  Commissioner  of  Internal  Revenue  may 
prescribe  such  other  method  for  the  cancellation  of  such  stamps  as  he  may 
deem  expedient. 


274  APPENDIX  B 

SEC.  805.  (a)  That  the  Commissioner  of  Internal  Revenue  shall  cause 
Prepara-  *°  ^e  prepared  and  distributed  for  the  payment  of  the  taxes 
tionand  prescribed  in  this  title  suitable  stamps  denoting  the  tax  on 
Distribu-  the  document,  articles,  or  thing  to  which  the  same  may  be 
tion  of  affixed,  and  shall  prescribe  such  method  for  the  affixing  of 

Stamps.  said  stamps  in  substitution  for  or  in  addition  to  the  method 
provided  in  this  title,  as  he  may  deem  expedient. 

(b)  The  Commissioner  of  Internal  Revenue,  with  the  approval  of  the 
Secretary  of  the  Treasury,  is  authorized  to  procure  any  of  the  stamps  pro- 
Procuring      vided  for  in  this  title  by  contract  whenever  such  stamps  can 
Stamps  by     not  be  speedily  prepared  by  the  Bureau  of  Engraving  and 
Govern-        Printing;  but  this  authority  shall  expire  on  the  first  day  of 
ment.  January,  nineteen  hundred  and  eighteen,  except  as  to  im- 
printed stamps  furnished  under  contract,  authorized  by  the  Commissioner 
of  Internal  Revenue. 

(c)  All  internal-revenue  laws  relating  to  the  assessment  and  collection 
Assess-         °f  taxes  are  hereby  extended  to  and  made  a  part  of  this  title, 
ment,  Col-     so  far  as  applicable,  for  the  purpose  of  collecting  stamp  taxes 
lection.          omitted  through  mistake  or  fraud  from  any  instrument,  docu- 
ment, paper,  writing,  parcel,  package,  or  article  named  herein. 

SEC.  806.  That  the  Commissioner  of  Internal  Revenue  shall  furnish  to 
the  Postmaster  General  without  prepayment  a  suitable  quantity  of  adhesive 
Stamps  stamps  to  be  distributed  to  and  kept  on  sale  by  the  various 
Advanced  postmasters  in  the  United  States.  The  Postmaster  General 
to  Post-  may  require  each  such  postmaster  to  give  additional  or  in- 
masters.  creased  bond  as  postmaster  for  the  value  of  the  stamps  so 
furnished,  and  each  such  postmaster  shall  deposit  the  receipts  from  the  sale 
of  such  stamps  to  the  credit  of  and  render  accounts  to  the  Postmaster  Gen- 
eral at  such  times  and  in  such  form  as  he  may  by  regulations  prescribe. 
The  Postmaster  General  shall  at  least  once  monthly  transfer  all  collections 
from  this  source  to  the  Treasury  as  internal-revenue  collections. 

SEC.  807.  That  the  collectors  of  the  several  districts  shall  furnish  without 
prepayment  to  any  assistant  treasurer  or  designated  depositary  of  the 
Sale  of  United  States  located  in  their  respective  collection  districts 

Stamps.  a  suitable  quantity  of  adhesive  stamps  for  sale.  In  such  cases 
the  collector  may  require  a  bond,  with  sufficient  sureties,  to  an  amount 
equal  to  the  value  of  the  adhesive  stamps  so  furnished,  conditioned  for  the 
faithful  return,  whenever  so  required,  of  all  quantities  or  amounts  undisposed 
of,  and  for  the  payment  monthly  of  all  quantities  or  amounts  sold  or  not 
remaining  on  hand.  The  Secretary  of  the  Treasury  may  from  time  to  time 
made  such  regulations  as  he  may  find  necessary  to  insure  the  safe-keeping 
or  prevent  the  illegal  use  of  all  such  adhesive  stamps. 

SCHEDULE  A. — STAMP  TAXES 

i.  Bonds  of  indebtedness:  Bonds,  debentures,  or  certificates  of  indebted- 
ness issued  on  and  after  the  first  day  of  December,  nineteen  hundred  and 
Bonds,  De-  seventeen,  by  any  person,  corporation,  partnership,  or  asso- 
bentures.  ciation,  on  each  $100  of  face  value  or  fraction  thereof,  5  cents; 


WAR   STAMP   TAXES  275 

Provided,  That  every  renewal  of  the  foregoing  shall  be  taxed  as  a  new  issue: 
Provided  further.  That  when  a  bond  conditioned  for  the  repayment  or  pay- 
ment of  money  is  given  in  a  penal  sum  greater  than  the  debt  Rate  of 
secured,  the  tax  shall  be  based  upon  the  amount  secured.        Tax. 

2.  Bonds,  indemnity  and  surety:  Bonds  for  indemnifying  any  person, 
corporation,  partnership,  or  corporation  who  shall  have  become  bound  or 
engaged  as  surety,  and  all  bonds  for  the  due  execution  or  per-   Surety 
formance  of  any  contract,  obligation,  or  requirement,  or  the  Bonds. 
duties  of  any  office  or  position,  and  to  account  for  money  received  by  virtue 
thereof,  and  all  other  bonds  of  any  description,  except  such  as  may  be  re- 
quired in  legal  proceedings,  not  otherwise  provided  for  in  this  Rate  of 
schedule,  50  cents;  Provided,  That  where  a  premium  is  charged   Tax. 

for  the  execution  of  such  bond  the  tax  shall  be  paid  at  the  rate  of  one  per 
centum  on  each  dollar  or  fractional  part  thereof  of  the  premium  charged: 
Provided  further,  That  policies  of  reinsurance  shall  be  exempt  from  the  tax 
imposed  by  this  subdivision. 

3.  Capital  stock,  issue:  On  each  original  issue,  whether  an  organization  or 
reorganization,    of  certificates  of  stock  by  any  association,   Capital 
company,  or  corporation,  on  each  $100  of  face  value  or  frac-   Stock. 
tion  thereof,  5  cents:  Provided,  That  where  capital  stock  is  issued  without 
face  value,  the  tax  shall  be  5  cents  per  share,  unless  the  actual   Original 
value  is  in  excess  of  $100  per  share,  in  which  case  the  tax  shall   Issue. 

be  5  cents  on  each  $100  of  actual  value  or  fraction  thereof. 

The  stamps  representing  the  tax  imposed  by  this  subdivision  shall  be 
attached  to  the  stock  books  and  not  to  the  certificates  issued. 

4.  Capital  stock,  sales  or  transfers:  On  all  sales,  or  agreements  to  sell, 
or  memoranda  of  sales  or  deliveries  of,  or  transfers  of  legal  title  to  shares 
or  certificates  of  stock  in  any  association,  company,  or  cor-   Capital 
poration,  whether  made  upon  or  shown  by  the  books  of  the   Stock, 
association,  company,  or  corporation,  or  by  any  assignment  in   Sales  and 
blank,  or  by  any  delivery,  or  by  any  paper  or  agreement  or  Transfers. 
memorandum  or  other  evidence  of  transfer  or  sale,  whether  entitling  the 
holder  in  any  manner  to  the  benefit  of  such  stock  or  not,  on  each  $100  of  face 
value  or  fraction  thereof,  2  cents,  and  where  such  shares  of  stock  are  without 
par  value,  the  tax  shall  be  2  cents  on  the  transfer  or  sale  or  Rate  of 
agreement  to  sell  on  each  share,  unless  the  actual  value  thereof  Tax. 

is  in  excess  of  $100  per  share,  in  which  case  the  tax  shall  be  2  cents  on  each 
$  TOO  of  actual  value  or  fraction  thereof:  Provided,  That  it  is  not  intended  by 
this  title  to  impose  a  tax  upon  an  agreement  evidencing  a  deposit  of  stock 
certificates  as  collateral  security  for  money  loaned  thereon,  which  stock 
certificates  are  not  actually  sold,  nor  upon  such  stock  certif-  «  ,. 
icates  so  deposited:  Provided  further,  That  the  tax  shall  not 
be  imposed  upon  deliveries  or  transfers  to  a  broker  for  sale,  nor  upon  deliver- 
ies or  transfers  by  a  broker  to  a  customer  for  whom  and  upon  whose  order 
he  has  purchased  same,  but  such  deliveries  or  transfers  shall  be  accompanied 
by  a  certificate  setting  forth  the  facts:  Provided  further,  That  in  case  of  sale 
where  the  evidence  of  transfer  is  shown  only  by  the  books  of  the  company 
the  stamp  shall  be  placed  upon  such  books;  and  where  the  change  of  owner- 


276  APPENDIX  B 

ship  is  by  transfer  of  the  certificate  the  stamp  shall  be  placed  upon  the 
Affixing  certificate;  and  in  cases  of  an  agreement  to  sell  or  where  the 
Stamps.  transfer  is  by  delivery  of  the  certificate  assigned  in  blank  there 
shall  be  made  and  delivered  by  the  seller  to  the  buyer  a  bill  or  memorandum 
of  such  sale,  to  which  the  stamp  shall  be  affixed;  and  every  bill  or  memoran- 
dum of  sale  or  agreement  to  sell  before  mentioned  shall  show  the  date  thereof, 
the  name  of  the  seller,  the  amount  of  the  sale,  and  the  matter  or  thing 
to  which  it  refers.  Any  person  or  persons  liable  to  pay  the  tax  as  herein  pro- 
vided, or  anyone  who  acts  in  the  matter  as  agent  or  broker  for  such  person 
Agents,  or  persons  who  shall  make  any  such  sale,  or  who  shall  in  pur- 
Brokers,  suance  of  any  such  sale  deliver  any  stock  or  evidence  of  the 
sale  of  any  stock  or  bill  or  memorandum  thereof,  as  herein  required,  without 
having  the  proper  stamps  affixed  thereto  with  intent  to  evade  the  foregoing 
p  ..  provisions  shall  be  deemed  guilty  of  a  misdemeanor,  and  upon 

conviction  thereof  shall  pay  a  fine  of  not  exceeding  $1,000, 
or  be  imprisoned  not  more  than  six  months,  or  both,  at  the  discretion  of 
the  court. 

5.  Produce,  sales  of,  on  exchange:  Upon  each  sale,  agreement  of  sale, 
or  agreement  to  sell,  including  so-called  transferred  or  scratch  sales,  any 
Sale  of  products  or  merchandise  at  any  exchange,  or  board  of  trade, 

Produce  or  other  similar  place,  for  future  delivery,  for  each  $100  in 
on  Ex-  value  of  the  merchandise  covered  by  said  sale  or  agreement 

change.  Of  saie  or  agreement  to  sell,  2  cents,  and  for  each  additional 
$100  or  fractional  part  thereof  in  excess  of  $100,  2  cents:  Provided,  That  on 
Rate  of  every  sale  or  agreement  of  sale  or  agreement  to  sell  as  afore- 
Tax.  said  there  shall  be  made  and  delivered  by  the  seller  to  the 

buyer  a  bill,  memorandum,  agreement,  or  other  evidence  of  such  sale,  agree- 
Evidence  ment  of  sale,  or  agreement  to  sell,  to  which  there  shall  be 
of  Sale.  affixed  a  lawful  stamp  or  stamps  in  value  equal  to  the  amount 
of  the  tax  on  such  sale:  Provided  further,  That  sellers  of  commodities  de- 
scribed herein,  having  paid  the  tax  provided  by  this  subdivision,  may  trans- 
fer such  contracts  to  a  clearing  house  corporation  or  association,  and  such 
transfer  shall  not  be  deemed  to  be  a  sale,  or  agreement  of  sale,  or  an  agree- 
ment to  sell  within  the  provisions  of  this  Act,  provided  that  such  transfer 
shall  not  vest  any  beneficial  interest  in  such  clearing  house  association  but 
shall  be  made  for  the  sole  purpose  of  enabling  such  clearing  house  association 
to  adjust  and  balance  the  accounts  of  the  members  of  said  clearing  house 
association  on  their  several  contracts.  And  every  such  bill,  memorandum, 
Agreement  or  other  evidence  of  sale  or  agreement  to  sell  shall  show  the 
of  Sale.  date  thereof,  the  name  of  the  seller,  the  amount  of  the  sale, 
and  the  matter  or  thing  to  which  it  refers;  and  any  person  or  persons  liable 
to  pay  the  tax  as  herein  provided,  or  anyone  who  acts  in  the  matter  as 
agent  or  broker  for  such  person  or  persons,  who  shall  make  any  such  sale 
or  agreement  of  sale,  or  agreement  to  sell,  or  who  shall,  in  pursuance  of  any 
such  sale,  agreement  of  sale,  or  agreement  to  sell,  deliver  any  such  products 
or  merchandise  without  a  bill,  memorandum,  or  other  evidence  thereof  as 
herein  required,  or  who  shall  deliver  such  bill,  memorandum,  or  other  evi- 
dence of  sale,  or  agreement  to  sell,  without  having  the  proper  stamps  affixed 


WAR   STAMP   TAXES  277 

thereto,  with  intent  to  evade  the  foregoing  provisions,  shall  be  deemed 
guilty  of  a  misdemeanor,  and  upon  conviction  thereof  shall   p       ... 
pay  a  fine  of  not  exceeding  $1,000,  or  be  imprisoned  not  more 
than  six  months,  or  both,  at  the  discretion  of  the  court. 

That  no  bill,  memorandum,  agreement,  or  other  evidence  of  such  sale, 
or  agreement  of  sale,  or  agreement  to  sell,  in  case  of  cash   Sales  Ex- 
sales  of  products  or  merchandise  for  immediate  or  prompt   empt. 
delivery  which  in  good  faith  are  actually  intended  to  be  delivered  shall  be 
subject  to  this  tax. 

6.  Drafts  or  checks  payable  otherwise  than  at  sight  or  on  demand,  promis- 
sory notes,  except  bank  notes  issued  for  circulation,  and  for  Time 
each  renewal  of  the  same,  for  a  sum  not  exceeding  $100,   Drafts  and 
2  cents;  and  for  each  additional  $100  or  fractional  part  thereof,   Notes. 

2  cents. 

7.  Conveyance:  Deed,  instrument,  or  writing,  whereby  any  lands,  tene- 
ments, or  other  realty  sold  shall  be  granted,  assigned,  transferred,  or  other- 
wise conveyed  to,  or  vested  in,  the  purchaser  or  purchasers,    Convey- 
or any  other  person  or  persons,  by  his,  her,  or  their  direction,   ances. 
when  the  consideration  or  value  of  the  interest  or  property  conveyed,  ex- 
clusive of  the  value  of  any  lien  or  encumbrance  remaining  thereon  at  the 
time  of  sale,  exceeds  $100  and  does  not  exceed  $500,  50  cents;   Rate  of 
and  for  each  additional  $500  or  fractional  part  thereof  50  Tax. 
cents:  Provided,  That  nothing  contained  in  this  paragraph  shall  be  so  con- 
strued as  to  impose  a  tax  upon  any  instrument  or  writing  given  to  secure 
a  debt. 

8.  Entry  of  any  goods,  wares,  or  merchandise  at  any  custom-house, 
either  for  consumption  or  warehousing,  not  exceeding  $100  in   Custom 
value,  25  cents;  exceeding  $100  and  not  exceeding  $500  in   House 
value,  50  cents;  exceeding  $500  in  value,  $i.  Entries. 

9.  Entry  for  the  withdrawal  of  any  goods  or  merchandise  from  customs 
bonded  warehouse,  50  cents. 

10.  Passage  ticket,  one  way  or  round  trip,  for  each  passenger,  sold  or 
issued  in  the  United  States  for  passage  by  any  vessel  to  a  port  or  place 
not  in  the  United  States,  Canada,  or  Mexico,  if  costing  not  Passage 
exceeding  $30,  $i;  costing  more  than  $30  and  not  exceeding   Tickets. 
$60,  $3;  costing  more  than  $60,  $5:  Provided,  That  such  passage  tickets, 
costing  $10  or  less,  shall  be  exempt  from  taxation. 

11.  Proxy  for  voting  at  any  election  for  officers,  or  meeting  for  the  trans- 
action of  business,  of  any  incorporated  company  or  associa-  p^     . 
tion,   except  religious,  educational,  charitable,  fraternal,  or       ' 
literary  societies,  or  public  cemeteries,  10  cents. 

12.  Power  of  attorney  granting  authority  to  do  or  perform  some  act 
for  or  in  behalf  of  the  grantor,  which  authority  is  not  otherwise  vested  in 
the  grantee,  25  cents:  Provided,  That  no  stamps  shall  be  re-  Powers  of 
quired  upon  any  papers  necessary  to  be  used  for  the  collec-  Attorney, 
tion  of  claims  from  the  United  States  or  from  any  State  for  pensions,  back 
pay,  bounty,  or  for  property  lost  in  the  military  or  naval  service  or  upon 
powers  of  attorney  required  in  bankruptcy  cases. 


278  APPENDIX  B 

13.  Playing  cards:  Upon  every  pack  of  playing  cards,  containing  not 
Playing          more  than  fifty- four  cards,  manufactured  or  imported,  and 
Cards.  sold,  or  removed  for  consumption  or  sale,  after  the  passage 
of  this  Act,  a  tax  of  5  cents  per  pack  in  addition  to  the  tax  imposed  under 
existing  law. 

14.  Parcel-post  packages:  Upon  every  parcel  or  package  transported 
Parcel  from  one  point  in  the  United  States  to  another  by  parcel 
Post  Pack-    post  on  which  the  postage  amounts  to  25  cents  or  more,  a 
ages.  tax  of  i  cent  for  each  25  cents  or  fractional  part  thereof  charged 
for  such  transportation,  to  be  paid  by  the  consignor. 

No  such  parcel  or  package  shall  be  transported  until  a  stamp  or  stamps 
representing  the  tax  due  shall  have  been  affixed  thereto. 


TITLE  IX.— WAR  ESTATE  TAX 

SEC.  900.  That  in  addition  to  the  tax  imposed  by  section  two  hundred 
When  Ef-  and  one  of  the  Act  entitled  "An  Act  to  increase  the  revenue, 
fective.  and  for  other  purposes,"  approved  September  eighth,  nine- 
teen hundred  and  sixteen,  as  amended — 

(a)  A  tax  equal  to  the  following  percentages  of  its  value  is  hereby  imposed 
upon  the  transfer  of  each  net  estate  of  every  decedent  dying  after  the  pas- 
Rates  of  sage  of  this  Act,  the  transfer  of  which  is  taxable  under  such 
Tax.  section  (the  value  of  such  net  estate  to  be  determined  as 

provided  in  Title  II  of  such  Act  of  September  eighth,  nineteen  hundred  and 
sixteen) : 

One-half  of  one  per  centum  of  the  amount  of  such  net  estate  not  in  excess 
of  $50,000; 

One  per  centum  of  the  amount  by  which  such  net  estate  exceeds  $50,000 
and  does  not  exceed  $150,000; 

One  and  one-half  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $150,000  and  does  not  exceed  $250,000; 

Two  per  centum  of  the  amount  by  which  such  net  estate  exceeds  $250,000 
and  does  not  exceed  $450,000; 

Two  and  one-half  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $450,000  and  does  not  exceed  $1,000,000; 

Three  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$1,000,000  and  does  not  exceed  $2,000,000; 

Three  and  one-half  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $2,000,000  and  does  not  exceed  $3,000,000; 

Four  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$3,000,000  and  does  not  exceed  $4,000,000; 

Four  and  one-half  per  centum  of  the  amount  by  which  such  net  estate 
exceeds  $4,000,000  and  does  not  exceed  $5,000,000; 

Five  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$5,000,000  and  does  not  exceed  $8,000,000; 

Seven  per  centum  of  the  amount  by  which  such  net  estate  exceeds 
$8,000,000  and  does  not  exceed  $10,000,000;  and 


ADMINISTRATIVE  PROVISIONS  279 

Ten  per  centum  of  the  amount  by   which  such   net  estate  exceeds 
$10,000,000. 

SEC.  901.  That  the  tax  imposed  by  this  title  shall  not  apply  to  the  transfer 
of  the  net  estate  of  any  decedent  dying  while  serving  in  the  military  or  naval 
forces  of  the  United  States,  during  the  continuance  of  the  war  In  Military 
in  which  the  United  States  is  now  engaged,  or  if  death  results  Service 
from  injuries  received  or  disease  contracted  in  such  service,   Exempt, 
within  one  year  after  the  termination  of  such  war.    For  the  purposes  of  this 
section  the  termination  of  the  war  shall  be  evidenced  by  the  proclamation  of 
the  President. 

TITLE  X.— ADMINISTRATIVE  PROVISIONS 

SEC.  looo.  That  there  shall  be  levied,  collected,  and  paid  in  the  United 
States,  upon  articles  coming  into  the  United  States  from  the  West  Indian 
Islands  acquired  from  Denmark,  a  tax  equal  to  the  internal-  Imports 
revenue  tax  imposed  in  the  United  States  upon  like  articles  from  West 
of  domestic  manufacture;  such  articles  shipped  from  said  Indian  Is- 
islands  to  the  United  States  shall  be  exempt  from  the  payment  lands. 
of  any  tax  imposed  by  the  internal-revenue  laws  of  said  islands:  Provided, 
That  there  shall  be  levied,  collected,  and  paid  in  said  islands,  upon  articles 
imported  from  the  United  States,  a  tax  equal  to  the  internal-revenue  tax 
imposed  in  said  islands  upon  like  articles  there  manufactured;  and  such 
articles  going  into  said  islands  from  the  United  States  shall  be  exempt  from 
payment  of  any  tax  imposed  by  the  internal-revenue  laws  of  the  United 
States. 

SEC.  1001.  That  all  administrative,  special,  or  stamp  provisions  of  law, 
including  the  law  relating  to  the  assessment  of  taxes,  so  far  as  applicable, 
are  hereby  extended  to  and  made  a  part  of  this  Act,  and  every  Adminis- 
person,  corporation,  partnership,  or  association  liable  to  any  tration 
tax  imposed  by  this  Act,  or  for  the  collection  thereof,  shall  Assess- 
keep  such  records  and  render,  under  oath,  such  statements  ment. 
and  returns,  and  shall  comply  with  such  regulations  as  the  Commissioner 
of  Internal  Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury, 
may  from  time  to  time  prescribe. 

SEC.  1002.  That  where  additional  taxes  are  imposed  by  this  Act  upon 
articles  or  commodities,  upon  which  the  tax  imposed  by  existing  law  has 
been  paid,  the  person,  corporation,  partnership,  or  association  Additional 
required  by  this  Act  to  pay  the  tax  shall,  within  thirty  days  Taxes. 
after  its  passage,  make  return  under  oath  in  such  form  and  under  such  regu- 
lations as  the  Commissioner  of  Internal  Revenue  with  the  approval  of  the 
Secretary  of  the  Treasury  shall  prescribe.  Payment  of  the  tax  shown  to  be 
due  may  be  extended  to  a  date  not  exceeding  seven  months  from  the  passage 
of  this  Act,  upon  the  filing  of  a  bond  for  payment  in  such  form  and  amount 
and  with  such  sureties  as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  may  prescribe. 

SEC.  1003.  That  in  all  cases  where  the  method  of  collecting  the  tax  im- 
posed by  this  Act  is  not  specifically  provided,  the  tax  shall  be  collected  in 


280  APPENDIX  B 

such  manner  as  the  Commissioner  of  Internal  Revenue  with  the  approval 
Method  of  of  the  Secretary  of  the  Treasury  may  prescribe.  All  adminis- 
Collection.  trative  and  penalty  provisions  of  Title  VIII  of  this  Act,  in  so  far 
as  applicable,  shall  apply  to  the  collection  of  any  tax  which  the  Commis- 
sioner of  Internal  Revenue  determines  or  prescribes  shall  be  paid  by  stamp. 

SEC.  1004.  That  whoever  fails  to  make  any  return  required  by  this  Act, 
or  the  regulations  made  under  authority  thereof  within  the  time  prescribed 
Penalties  or  w^°  ma^es  anv  ^a^se  or  fraudulent  return,  and  whoever 
evades  or  attempts  to  evade  any  tax  imposed  by  this  Act  or  fails 
to  collect  or  truly  to  account  for  and  pay  over  any  such  tax,  shall  be  subject 
to  a  penalty  of  not  more  than  $1,000,  or  to  imprisonment  for  not  more  than 
one  year,  or  both,  at  the  discretion  of  the  court,  and  in  addition  thereto  a 
penalty  of  double  the  tax  evaded,  or  not  collected,  or  accounted  for  and  paid 
over,  to  be  assessed  and  collected  in  the  same  manner  as  taxes  are  assessed 
and  collected,  in  any  case  in  which  the  punishment  is  not  otherwise  specific- 
ally provided. 

Rules  and  SEC.  1005.  That  the  Commissioner  of  Internal  Revenue, 
Regula-  with  the  approval  of  the  Secretary  of  the  Treasury,  is  hereby 
tions.  authorized  to  make  all  needful  rules  and  regulations  for  the 

enforcement  of  the  provisions  of  this  Act. 

SEC.  1006.  That  where  the  rate  of  tax  imposed  by  this  Act,  payable  by 
stamps,  is  an  increase  over  previously  existing  rates,  stamps  on  hand  in  the 
Stamps  on  collectors'  offices  and  in  the  Bureau  of  Internal  Revenue  may 
Hand.  continue  to  be  used  until  the  supply  on  hand  is  exhausted,  but 

shall  be  sold  and  accounted  for  at  the  rates  provided  by  this  Act,  and  assess- 
ment shall  be  made  against  manufacturers  and  other  taxpayers  having  such 
stamps  on  hand  on  the  day  this  Act  takes  effect  for  the  difference  between 
the  amount  paid  for  such  stamps  and  the  tax  due  at  the  rates  provided  by 
this  Act. 

SEC.  1007.  That  (a)  if  any  person,  corporation,  partnership,  or  associa- 
tion has  prior  to  May  ninth,  nineteen  hundred  and  seventeen,  made 
Prior  Con-  a  bona  fide  contract  with  a  dealer  for  the  sale,  after  the  tax 
tracts.  takes  effect,  of  any  article,  (or  in  the  case  of  moving  picture 

films,  such  a  contract  with  a  dealer,  exchange,  or  exhibitor,  for  the  sale  or 
lease  thereof)  upon  which  a  tax  is  imposed  under  Title  III,  IV,  or  VI,  or 
under  subdivision  thirteen  of  Schedule  A  of  Title  VIII,  or  under  this  section, 
and  (b)  if  such  contract  does  not  permit  the  adding  of  the  whole  of  such 
tax  to  the  amount  to  be  paid  under  such  contract,  then  the  vendee  or  lessee 
shall,  in  lieu  of  the  vendor  or  lessor,  pay  so  much  of  such  tax  as  is  not  so 
permitted  to  be  added  to  the  contract  price. 

The  taxes  payable  by  the  vendee  or  lessee  under  this  section  shall  be 
paid  to  the  vendor  or  lessor  at  the  tune  the  sale  or  lease  is  consummated, 
Vendor,  and  collected,  returned,  and  paid  to  the  United  States  by 
Lessor.  such  vendor  or  lessor  in  the  same  manner  as  provided  in 
section  five  hundred  and  three. 

The  term  "dealer"  as  used  in  this  section  includes  a  vendee  who  pur- 
"  Dealer  "  chases  any  article  with  intent  to  use  it  in  the  manufacture 
Defined.  or  production  of  another  article  intended  for  sale. 


POSTAL  RATES  281 

SEC.  1008.  That  in  the  payment  of  any  tax  under  this  Act  not  payable 
by  stamp  a  fractional  part  of  a  cent  shall  be  disregarded  un-  Fraction  of 
less  it  amounts  to  one-half  cent  or  more,  in  which  case  it  shall   Cent, 
be  increased  to  one  cent. 

SEC.  1009.  That  the  Secretary  of  the  Treasury,  under  rules  and  regula- 
tions prescribed  by  him,  shall  permit  taxpayers  liable  to  income  and  excess 
profits  taxes  to  make  payments  in  advance  in  installments  AclVanCe 
or  in  whole  of  an  amount  not  in  excess  of  the  estimated  taxes  Install- 
which  will  be  due  from  them,  and  upon  determination  of  the  ment, 
taxes  actually  due  any  amount  paid  in  excess  shall  be  refunded   Payments 
as  taxes  erroneously  collected:  Provided,  That  when  payment  is  of  Income 
made  in  installments  at  least  one-fourth  of  such  estimated  tax   an(^  Excess 
shall  be  paid  before  the  expiration  of  thirty  days  after  the  close  Pr°fits 
of  the  taxable  year,  at  least  an  additional  one-fourth  within  two      axes* 
months  after  the  close  of  the  taxable  year,  at  least  an  additional  one-fourth 
within  four  months  after  the  close  of  the  taxable  year,  and  the  remainder 
of  the  tax  due  on  or  before  the  time  now  fixed  by  law  for  such  payment: 
Provided  further,  That  the  Secretary  of  the  Treasury,  under  rules  and  regula- 
tions prescribed  by  him,  may  allow  credit  against  such  taxes  so  paid  in 
advance  of  an  amount  not  exceeding  three  per  centum  per  annum  calculated 
upon  the  amount  so  paid  from  the  date  of  such  payment  to  the  date  now 
fixed  by  law  for  such  payment;  but  no  such  credit  shall  be  allowed  on  pay- 
ments in  excess  of  taxes  determined  to  be  due,  nor  on  payments  made  after 
the  expiration  of  four  and  one-half  months  after  the  close  of  the  taxable 
year.     All  penalties  provided  by  existing  law  for  failure  to  pay  tax  when 
due  are  hereby  made  applicable  to  any  failure  to  pay  the  tax  at  the  time 
or  times  required  in  this  section. 

SEC.  1010.  That  under  rules  and  regulations  prescribed  by  the  Secre- 
tary of  the  Treasury,  collectors  of  internal  revenue  may  receive,  at  par 
and  accrued  interest,  certificates  of  indebtedness  issued  under  Payment 
section  six  of  the  Act  .entitled  "An  Act  to  authorize  an  issue  by    Certifi- 
of  bonds  to  meet  expenditures  for  the  national  security  and  cates  of  In- 
defense,  and,  for  the  purpose  of  assisting  in  the  prosecution   debted- 
of  the  war,  to  extend  credit  to  foreign  governments,  and  ness. 
for  other  purposes,"  approved  April  twenty-fourth,  nineteen  hundred  and 
seventeen,  and  any  subsequent  Act  or  Acts,  and  uncertified  checks  in  pay- 
ment of  income  and  excess-profits  taxes,  during  such  time   Uncertified 
and  under  such  regulations  as  the  Commissioner  of  Internal   Checks. 
Revenue,  with  the  approval  of  the  Secretary  of  the  Treasury,  shall  pre- 
scribe; but  if  a  check  so  received  is  not  paid  by  the  bank  on  which  it  is  drawn 
the  person  by  whom  such  check  has  been  tendered  shall  remain  liable  for 
the  payment  of  the  tax  and  for  all  legal  penalties  and  additions  the  same 
as  if  such  check  had  not  been  tendered. 

TITLE  XI.— POSTAL  RATES 

SEC.  noo.  That  the  rate  of  postage  on  all  mail  matter  of  the  first  class, 
except  postal  cards,  shall  thirty  days  after  the  passage  of  this  Act  be,  in 
addition  to  the  existing  rate,  i  cent  for  each  ounce  or  fraction  thereof: 


282  APPENDIX  B 

Provided,  That  the  rate  of  postage  on  drop  letters  of  the  first  class  shall  be 
Mail  Mat-  2  cents  an  ounce  or  fraction  thereof.  Postal  cards,  and  pri- 
ter  First  vate  mailing  or  post  cards  when  complying  with  the  require- 
Class.  ments  of  existing  law,  shall  be  transmitted  through  the  mails  at 

i  cent  each  in  addition  to  the  existing  rate. 

That  letters  written  and  mailed  by  soldiers,  sailors,  and  marines  assigned 
Free  of  to  duty  in  a  foreign  country  engaged  in  the  present  war  may 
Postage.  be  mailed  free  of  postage,  subject  to  such  rules  and  regulations 
as  may  be  prescribed  by  the  Postmaster  General. 

SEC.  no  i.  That  on  and  after  July  first,  nineteen  hundred  and  eighteen, 
the  rates  of  postage  on  publications  entered  as  second-class  matter  (includ- 
Second  ing  sample  copies  to  the  extent  of  ten  per  centum  of  the 
Class  Mail,  weight  of  copies  mailed  to  subscribers  during  the  calendar 
year)  \vhen  sent  by  the  publisher  thereof  from  the  post  office  of  publication 
or  other  post  office,  or  when  sent  by  a  news  agent  to  actual  subscribers 
thereto,  or  to  other  news  agents  for  the  purpose  of  sale: 

(a)  In  the  case  of  the  portion  of  such  publication  devoted  to  matter 
other  than  advertisements,  shall  be  as  follows:  (i)  On  and  after  July  first, 
Rates  of        nineteen  hundred  and  eighteen,  and  until  July  first,  nine- 
Tax,  teen  hundred  and  nineteen,  i*4  cents  per  pound  or  fraction 
thereof;  (2)  on  and  after  July  first,  nineteen  hundred  and  nineteen,  i^4 
cents  per  pound  or  fraction  thereof. 

(b)  In  the  case  of  the  portion  of  such  publication  devoted  to  advertise- 
Portion          ments  the  rates  per  pound  or  fraction  thereof  for  delivery 
Devoted  to  within  the  several  zones  applicable  to  fourth-class  matter 
Advertise-    shall  be  as  follows  (but  where  the  space  devoted  to  advertise- 
ments, ments  does  not  exceed  five  per  centum  of  the  total  space, 
the  rate  of  postage  shall  be  the  same  as  if  the  whole  of  such  publication 
Rates  July    was  devoted  to  matter  other  than  advertisements):  (i)  On 
1,  1918,        and   after  July  first,  nineteen  hundred  and  eighteen,  and 
until  July  first,  nineteen  hundred  and  nineteen,  for  the  first  and  second 
zones,  i*4  cents;  for  the  third  zone,  i>£  cents;  for  the  fourth  zone,  2  cents; 
for  the  fifth  zone,  2%  cents;  for  the  sixth  zone,  2^2  cents;  for  the  seventh 
July  1,          zone,  3  cents;  for  the  eighth  zone,  3^  cents;  (2)  on  and  after 
1919)             July  first,  nineteen  hundred  and  nineteen,  and  until  July  first, 
nineteen  hundred  and  twenty,  for  the  first  and  second  zones,  i>£  cents; 
for  the  third  zone,  2  cents;  for  the  fourth  zone,  3  cents;  for  the  fifth  zone 
3K  cents;  for  the  sizth  zone,  4  cents;  for  the  seventh  zone,  5  cents;  for  the 
Julyl,            eighth  zone,  $y?  cents;  (3)  on  and  after  July  first,  nineteen 

1920.  hundred  and  twenty,  and  until  July  first,  nineteen  hundred 
and  twenty-one,  for  the  first  and  second  zones,  iy4  cents;  for  the  third 
zone,  2j^  cents;  for  the  fourth  zone,  4  cents;  for  the  fifth  zone,  4^4  cents; 
for  the  sixth  zone,  5^  cents;  for  the  seventh  zone,  7  cents;  for  the  eighth 
July  1,           zone,  7^4  cents;  (4)  on  and  after  July  first,  nineteen  hundred 

1921.  and  twenty-one,  for  the  first  and  second  zones,  2  cents;  for 
the  third  zone,  3  cents;  for  the  fourth  zone,  5  cents;  for  the  fifth  zone,  6 
cents;  for  the  sixth  zone,  7  cents;  for  the  seventh  zone,  9  cents;  for  the 
eighth  zone,  10  cents; 


POSTAL  RATES  283 

(c)  With  the  first  mailing  of  each  issue  of  each  such  publication,  the 
publisher  shall  file  with  the  postmaster  a  copy  of  such  issue,  together  with 
a  statement  containing  such  information  as  the  Postmaster  TVJ      CODV 
General  may  prescribe  for  determining  the  postage  charge- 
able thereon. 

SEC.  1 102.  That  the  rate  of  postage  on  daily  newspapers,  when  the  same 
are  deposited  in  a  letter-carrier  office  for  delivery  by  its  carriers,  shall  be  the 
same  as  now  provided  by  law;  and  nothing  in  this  title  shall  Daily 
affect  existing  law  as  to  free  circulation  and  existing  rates  on  News- 
second-class  mail  matter  within  the  county  of  publication:   papers. 
Provided,  That  the  Postmaster  General  may  hereafter  require  publishers  to 
separate  or  make  up  to  zones  in  such  a  manner  as  he  may  direct  all  mail 
matter  of  the  second  class  when  offered  for  mailing. 

SEC.  1103.  That  in  the  case  of  newspapers  and  periodicals  entitled  to  be 
entered  as  second-class  matter  and  maintained  by  and  in  the  interest  of 
religious,    educational,   scientific,    philanthropic,   agricultural  Religious, 
labor,  or  fraternal  organizations  or  associations,  not  organized  Educa- 
for  profit  and  none  of  the  net  income  of  which  inures  to  the  tional,  etc., 
benefit  of  any  private  stockholder  or  individual,  the  second-   Publica- 
class  postage  rates  shall  be,  irrespective  of  the  zone  in  which  tions. 
delivered  (except  when  the  same  are  deposited  in  a  letter  carrier  office  for 
delivery  by  its  carriers,  in  which  case  the  rates  shall  be  the  same  as  now  pro- 
vided by  law),  il/%  cents  a  pound  or  fraction  thereof  on  and  after  July  first, 
nineteen  hundred  and  eighteen,  and  until  July  first,  nineteen  hundred  and 
nineteen,  and  on  and  after  July  first,  nineteen  hundred  and 
nineteen,  i^  cents  a  pound  or  fraction  thereof.    The  publish- 
ers of  such  newspapers  or  periodicals  before  being  entitled  to  the  foregoing 
rates  shall  furnish  to  the  Postmaster  General,  at  such  tunes  and  under  such 
conditions  as  he  may  prescribe,  satisfactory  evidence  that  none  of  the  net 
income  of  such  organization  inures  to  the  benefit  of  any  private  stockholder  or 
individual. 

SEC.  1104.  That  where  the  total  weight  of  any  one  edition  or  issue  of 
any  publication  mailed  to  any  one  zone  does  not  exceed  one  *«•  .  «. 
pound,  the  rate  of  postage  shall  be  i  cent. 

SEC.  1105.  The  zone  rates  provided  by  this  title  shall  relate  to  the  entire 
bulk  mailed  to  any  one  zone  and  not  to  individually  addressed  Zone 
packages.  Rates. 

SEC.  1106.  That  where  a  newspaper  or  periodical  is  mailed  by  other  than 
the  publisher  or  his  agent  or  a  news  agent  or  dealer,  the  rate  shall  be  the 
same  as  now  provided  by  law. 

SEC.  1107.  That  the  Postmaster  General,  on  or  before  the  tenth  day  of 
each  month,  shall  pay  into  the  general  fund  of  the  Treasury  Payment 
an  amount  equal  to  the  difference  between  the  estimated   to  General 
amount  received  during  the  preceding  month  for  the  trans-  Fund. 
portation  of  first  class  matter  through  the  mails  and  the  estimated  amount 
which  would  have  been  received  under  the  provisions  of  the  law  in  force 
at  the  time  of  the  passage  of  this  Act. 


284  APPENDIX   B 

SEC.  1108.  That  the  salaries  of  postmasters  at  offices  of  the  first,  second, 
Salaries  and  third  classes  shall  not  be  increased  after  July  first,  nine- 
Postmas-  teen  hundred  and  seventeen,  during  the  existence  of  the  present 
ters.  war.  The  compensation  of  postmasters  at  offices  of  the  fourth 

class  shall  continue  to  be  computed  on  the  basis  of  the  present  rates  of  post- 
age. 

SEC.  1109.  That  where  postmasters  at  offices  of  the  third  class  have  been 
Leave  for  since  May  first,  nineteen  hundred  and  seventeen,  or  hereafter 
Military  are  granted  leave  without  pay  for  military  purposes,  the  Post- 
Service,  master  General  may  allow,  in  addition  to  the  maximum 
amounts  which  may  now  be  allowed  such  offices  for  clerk  hire,  in  accordance 
with  law,  an  amount  not  to  exceed  fifty  per  centum  of  the  salary  of  the 
postmaster. 

SEC.  1 1 10.  That  section  five  of  the  Act  approved  March  third,  nineteen 
hundred  and  seventeen,  entitled  "An  Act  making  appropriations  for  the 
Construe-  Post  Office  Department  for  the  year  ending  June  thirtieth, 
tion.  nineteen  hundred  and  eighteen,"  shall  not  be  construed  to 

apply  to  ethyl  alcohol  for  governmental,  scientific,  medicinal,  mechanical, 
manufacturing,  and  industrial  purposes,  and  the  Postmaster  General  shall 
prescribe  suitable  rules  and  regulations  to  carry  into  effect  this  section  in 
connection  with  the  Act  of  which  it  is  amendatory,  nor  shall  said  section 
be  held  to  prohibit  the  use  of  the  mails  by  regularly  ordained  ministers  of 
religion,  or  by  officers  of  regularly  established  churches,  for  ordering  wines 
for  sacramental  uses,  or  by  manufacturers  and  dealers  for  quoting  and  billing 
such  wines  for  such  purposes  only. 

TITLE  XII. — INCOME  TAX  AMENDMENTS 
Inserted  in  Federal  Income  Tax  Law  (Appendix  A,  page  219.) 

TITLE  XIII. — GENERAL  PROVISIONS 

SEC.  1300.  That  if  any  clause,  sentence,  paragraph,  or  part  of  this  Act 
shall  for  any  reason  be  adjudged  by  any  court  of  competent  jurisdiction 
Saving  to  be  invalid,  such  judgment  shall  not  affect,  impair,  or  in- 

Clause.  validate  the  remainder  of  said  Act,  but  shall  be  confined  in  its 
operation  to  the  clause,  sentence,  paragraph,  or  part  thereof  directly  in- 
volved in  the  controversy  in  which  such  judgment  shall  have  been  rendered. 

SEC.  1301.  That  Title  I  of  the  Act  entitled  "An  Act  to  provide  increased 
revenue  to  defray  the  expenses  of  the  increased  appropriations  for  the 
Title  Re-  Army  and  Navy  and  the  extension  of  fortifications,  and  for 
pealed.  other  purposes,"  approved  March  third,  nineteen  hundred 
and  seventeen,  be,  and  the  same  is  hereby,  repealed. 

Eff  ct*  ^EC*  Z3O2'  That  unless  otherwise  herein  specially  provided, 

this  Act  shall  take  effect  on  the  day  following  its  passage. 

Approved,  October  3,  1917. 


APPENDIX  C 

FEDERAL  CORPORATION  CAPITAL  STOCK  TAX  LAW 
ENACTED  SEPTEMBER  8,  1916 

SEC.  407.  That  on  and  after  January  first,  nineteen  hundred  and  seven- 
teen, special  taxes  shall  be,  and  hereby  are,  imposed  annually,   When  Ef- 
as  follows,  that  is  to  say:  f active. 

Every  corporation,  joint-stock  company  or  association,  now  or  here- 
after organized  in  the  United  States  for  profit  and  having  a  capital  stock 
represented  by  shares,  and  every  insurance  company,  now   All  Corpo- 
or  hereafter  organized  under  the  laws  of  the  United  States,   rations  Or- 
or  any  State  or  Territory  of  the  United  States,  shall  pay  ganized  for 
annually  a  special  excise  tax  with  respect  to  the  carrying  on  Profit, 
or  doing  business  by  such  corporation,  joint-stock  company  or  association, 
or  insurance  company,  equivalent  to  50  cents  for  each  $1,000  of  the  fair 
value  of  its  capital  stock  and  in  estimating  the  value  of  capital   p   . 
stock,  the  surplus  and  undivided  profits  shall  be  included: 
Provided,  That  in  the  case  of  insurance  companies  such  deposits  and  reserve 
funds  as  they  are  required  by  law  or  contract  to  maintain  or  hold  for  the 
protection  of  or  payment  to  or  apportionment  among  policyholders  shall 
not  be  included.    The  amount  of  such  annual  tax  shall  in  all  cases  be  com- 
puted on  the  basis  of  the  fair  average  value  of  the  capital  stock  for  the 
preceding  year:  Provided,  That  for  the  purpose  of  this  tax   Exemp- 
an  exemption  of  $99,000  shall  be  allowed  from  the  capital   tion. 
stock  as  defined  in  this  paragraph  of  each  corporation,  joint-stock  company 
or  association,  or  insurance  company:  Provided  further,  That  a  corporation, 
joint-stock  company  or  association,  or  insurance   company,    Munitions 
actually  paying  the  tax  imposed  by  section  three  hundred  Tax  Cred- 
and  one  of  Title  III  of  this  act  shall  be  entitled  to  a  credit  itable. 
as  against  the  tax  imposed  by  this  paragraph  equal  to  the  amount  of  the 
tax  so  actually  paid:  And  provided  further.  That  this  tax  shall  not  be  im- 
posed   upon   any   corporation,   joint-stock   company  or  as-  Preceding 
sociation,   or   insurance  company  not  engaged  in  business  Taxable 
during  the  preceding  taxable  year,  or  which  is  exempt  under  Year, 
the  provisions  of  section  eleven,  Title  I,  of  this  act. 

Every  corporation,  joint-stock   company  or  association,   or  insurance 
company,  now  or  hereafter  organized  for  profit  under  the  laws  of  any  foreign 
country  and  engaged  in  business  in  the  United  States  shall  pay  Foreign 
annually  a  special  excise  tax  with  respect  to  the  carrying  on  or   Corpora- 
doing  business  in  the  United  States  by  such  corporation  joint-  tions. 
stock  company  or  association,  or  insurance  company,  equivalent  to  50  cents 
for  each  $1,000  of  the  capital  actually  invested  in  the  tran- 
saction  of  its  business  in  the  United  States:  Provided,  That 


286  APPENDIX   C 

in  the  case  of  insurance  companies  such  deposits  or  reserve  funds  as  they 
Reserve  are  required  by  law  or  contract  to  maintain  or  hold  in  the 
Funds  of  United  States  for  the  protection  of  or  payment  to  or  appor- 
Insurance  tionment  among  policyholders,  shall  not  be  included.  The 
Companies,  amount  of  such  annual  tax  shall  in  all  cases  be  computed  on 
the  basis  of  the  average  amount  of  capital  so  invested  during  the  preceding 
year:  Provided,  That  for  the  purpose  of  this  tax  an  exemption  from  the 
Average  amount  of  capital  so  invested  shall  be  allowed  equal  to  such 
Capital.  proportion  of  $99,000  as  the  amount  so  invested  bears  to 
the  total  amount  invested  in  the  transaction  of  business  in  the  United  States 
Exemp-  or  elsewhere:  Provided,  further,  That  this  exemption  shall  be 
tion.  allowed  only  if  such  corporation,  joint-stock  company  or 

association,  or  insurance  company  makes  return  to  the  Commissioner  of 
Internal  Revenue,  under  regulations  prescribed  by  him,  with  the  approval 
of  the  Secretary  of  the  Treasury,  of  the  amount  of  capital  invested  in  the 
transaction  of  business  outside  the  United  States:  And  provided  further, 
That  a  corporation,  joint-stock  company  or  association,  or  insurance  com- 
Munitions  pany  actually  paying  the  tax  imposed  by  section  three  hun- 
Tax.  dred  and  one  of  Title  III  of  this  act,  shall  be  entitled  to  a 

credit  as  against  the  tax  imposed  by  this  paragraph  equal  to  the  amount 
of  the  tax  so  actually  paid:  And  provided  further ,  That  this  tax  shall  not  be 
Preceding  imposed  upon  any  corporation,  joint-stock  company  or  asso- 
Year.  ciation,  or  insurance  company  not  engaged  in  business  during 

the  preceding  taxable  year,  or  which  is  exempt  under  the  provisions  of 
section  eleven,  Title  I,  of  this  act. 

SEC.  408.  (Last  paragraph.)  Every  preson  who  carries  on  any  business 
or  occupation  for  which  special  taxes  are  imposed  by  this  title,  without 
P  altv  having  paid  the  special  tax  therein  provided,  shall,  besides 
being  liable  to  the  payment  of  such  special  tax,  be  deemed 
guilty  of  a  misdemeanor,  and  upon  conviction  thereof  shall  pay  a  fine  of 
not  more  than  $500,  or  be  imprisoned  not  more  than  six  months,  or  both, 
in  the  discretion  of  the  court. 

SEC.  409.  That  all  administrative  or  special  provisions  of  law,  includ- 
Adminis-  ing  the  law  relating  to  the  assessment  of  taxes,  so  far  as  ap- 
tration.  plicable,  are  hereby  extended  to  and  made  a  part  of  this 
title,  and  every  person,  firm,  company,  corporation,  or  association  liable 
to  any  tax  imposed  by  this  title,  shall  keep  such  records  and  render,  under 
R  c  rds  oath,  such  statements  and  returns,  and  shall  comply  with 
such  regulations  as  the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the  Treasury,  may  from  time  to  time 
prescribe. 

REGULATIONS 

Concerning  the  special  excise  tax  imposed  by  section  407,  Title  IV,  act  of 
September  8,  1916,  on  corporations,  joint-stock  companies  or  associa- 
tions, and  insurance  companies,  organized  for  profit  in  the  United 
States,  and  on  the  capital  invested  in  the  United  States  of  foreign 
companies  and  associations  transacting  business  in  the  United  States. 


CAPITAL  STOCK  TAX  REGULATIONS  287 

RETURNS    COMPUTATION  OF  TAX,  COLLECTIONS,  AND  PENALTIES 

Tax  imposed 

Article  i.  Section  407  imposes  a  special  excise  tax  with  respect  to  the 
carrying  on  or  doing  business  by  corporations,  joint-stock  companies  or 
associations,  or  insurance  companies,  as  follows: 

Corporations  in  the  United  States 

(a)  Every  corporation,  joint-stock  company  or  association,  or  insurance 
company,  now  or  hereafter  organized  in  the  United  States  for  profit  and 
having  a  capital  stock  represented  by  shares,  50  cents  for  each  $1,000  of 
the  fair  value  of  the  capital  stock  in  excess  of  $99,000,  except  as  hereinafter 
indicated;  and 

Foreign  Corporations 

(6)  Every  corporation,  joint-stock  company  or  association,  or  insurance 
company,  now  or  hereafter  organized  for  profit  under  the  laws  of  any  for- 
eign country  and  engaged  in  business  in  the  United  States,  50  cents  for  each 
$1,000  of  the  capital  actually  invested  in  the  transaction  of  its  business  in 
the  United  States.  It  is  provided  in  cases  in  which  the  foreign  corporation 
makes  a  return  of  the  total  amount  of  capital  invested  in  the  transaction 
of  business,  both  abroad  and  in  this  country,  that  such  proportion  of  $99,000 
as  the  amount  invested  in  the  United  States  bears  to  the  total  amount 
invested  in  the  United  States  and  elsewhere  may  be  remitted  in  computing 
the  tax  upon  the  capital  invested  in  the  United  States. 

Corporations  Exempt 
Corporations  and  associations  exempt 

Art.  2.  (a)  The  following  corporations,  joint-stock  companies  or  associa- 
tions, or  insurance  companies,  which  are  exempt  from  income  tax  under  the 
provisions  of  section  n,  Title  I,  are  also  specifically  exempt  from  the  capital- 
stock  tax  under  section  407,  Title  IV,  of  this  act: 

First.  Labor,  agricultural,  or  horticultural  organization; 

Second.  Mutual  savings  bank  not  having  a  capital  stock  represented  by 
shares; 

Third.  Fraternal  beneficiary  society,  order,  or  association,  operating 
under  the  lodge  system  or  for  the  exclusive  benefit  of  the  members  of  a  fra- 
ternity itself  operating  under  the  lodge  system,  and  providing  for  the  pay- 
ment of  life,  sick,  accident,  or  other  benefits  to  the  members  of  such  society, 
order,  or  association,  or  their  dependents; 

Fouth.  Domestic  building  and  loan  association  and  coSperative  banks 
without  capital  stock  organized  and  operated  for  mutual  purposes  and  with- 
out profit; 

Fifth.  Cemetery  company  owned  and  operated  exclusively  for  the  benefit 
of  its  members; 

Sixth.  Corporation  or  association  organized  and  operated  exclusively  for 


288  APPENDIX  C 

religious,  charitable,  scientific,  or  educational  purposes,  no  part  of  the  net  in- 
come of  which  inures  to  the  benefit  of  any  private  stockholder  or  individual; 

Seventh.  Business  league,  chamber  of  commerce,  or  board  of  trade,  not 
organized  for  profit  and  no  part  of  the  net  income  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual; 

Eighth.  Civic  league  or  organization  not  organized  for  profit  but  operated 
exclusively  for  the  promotion  of  social  welfare; 

Ninth.  Club  organized  and  operated  exclusively  for  pleasure,  recreation, 
and  other  nonprofitable  purposes,  no  part  of  the  net  income  of  which  inures 
to  the  benefit  of  any  private  stockholder  or  member; 

Tenth.  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insurance  company, 
mutual  ditch  or  irrigation  company,  mutual  or  cooperative  telephone  com- 
pany, or  like  organization  of  a  purely  local  character,  the  income  of  which 
consists  solely  of  assessments,  dues,  and  fees  collected  from  members  for  the 
sole  purpose  of  meeting  its  expenses; 

Eleventh.  Farmers,'  fruit  growers,'  or  like  association,  organized  and 
operated  as  a  sales  agent  for  the  purpose  of  marketing  the  products  of  its 
members  and  turning  back  to  them  the  proceeds  of  sales,  less  the  necessary 
selling  expenses,  on  the  basis  of  the  quantity  of  produce  furnished  by  them; 

Twelfth.  Corporation  or  association  organized  for  the  exclusive  purpose 
of  holding  title  to  property,  collecting  income  therefrom,  and  turning  over 
the  entire  amount  thereof,  less  expenses,  to  an  organization  which  itself 
is  exempt  from  the  tax  imposed  by  this  title;  or 

Thirteenth.  Federal  land  banks  and  national  farm-loan  associations  as 
provided  in  section  twenty-six  of  the  act  approved  July  seventeenth,  nine- 
teen hundred  and  sixteen,  entitled  "An  act  to  provide  capital  for  agricultural 
development,  to  create  standard  forms  of  investment  based  upon  farm  mort- 
gage, to  equalize  rates  of  interest  upon  farm  loans,  to  furnish  a  market  for 
United  States  bonds,  to  create  Government  depositaries  and  financial  agents 
for  the  United  States,  and  for  other  purposes." 

Mutual  companies  exempt 

(6)  Inasmuch  as  the  basis  of  tax  is  the  fair  value  of  the  stock  of  a  cor- 
poration, mutual  insurance  companies  and  other  associations  not  having 
capital  stock  represented  by  shares  will  also  be  exempt  from  tax,  in  the 
absence  of  a  basis  for  the  computation  of  the  tax. 

Returns 
Tax  due  in  January  and  July,  1917,  and  annually  in  July  thereafter 

Art.  3.  (a)  Section  3237,  Revised  Statutes,  as  amended  by  section  53 
of  the  act  of  October  i,  1890  (26  Stats.,  567),  provides  "that  all  special 
taxes  shall  become  due  on  the  ist  day  of  July,  1891,  and  on  the  ist  day  of 
July  in  each  year  thereafter,  or  on  commencing  any  trade  or  business  on 
which  such  tax  is  imposed.  In  the  former  case  the  tax  shall  be  reckoned 
for  one  year,  and  in  the  latter  case  it  shall  be  reckoned  proportionately 
from  the  ist  day  of  the  month  in  which  the  liability  to  a  special  tax  com- 


CAPITAL  STOCK  TAX  REGULATIONS  289 

menced  to  the  ist  day  of  July  following."  The  capital-stock  tax,  therefore, 
which  becomes  effective  January  i,  1917,  will  be  payable  in  January,  1917, 
on  returns  to  be  made  during  that  month  for  the  six  months  ending  June  30, 
1917.  In  July,  1917,  and  annually  in  July  thereafter,  returns  must  again 
be  made  and  the  tax  paid  for  the  ensuing  fiscal  year. 

Returns  required  of  every  United  States  corporation  having  capital  stock 
outstanding  of  $75,000  or  over 

(b)  Every  corporation,  joint-stock  company  or  association,  or  insurance 
company,  organized  in  the  United  States  for  profit  and  having  a  capital 
stock  issued  and  outstanding,  represented  by  shares  of  the  market  value  of 
$75,000  or  over,  and  not  exempt  as  indicated  in  article  2,  shall  make  a  return 
on  Form  707  irrespective  of  the  par  value  of  its  capital  stock,  unless  such 
corporation,   joint-stock  company  or  association,  or  insurance   company 
was  not  engaged  in  business  during  the  preceding  taxable  year,  which  for 
the  return  due  January  i,  1917,  shall  be  the  fiscal  year  July  i,  1915,  to  June 
30,  1916. 

Return  required  of  every  foreign  corporation 

(c)  Every  corporation,  joint-stock  company  or  association,  or  insurance 
company,  organized  for  profit  under  the  laws  of  any  foreign  country  and 
engaged  in  business  in  the  United  States,  shall  make  return  on  Form  708 
irrespective  of  the  amount  of  capital  employed  either  at  home  or  in  this 
country  in  the  transaction  of  its  business. 

Form  of  return  for  United  States  corporations 
Substance  of  return  required  from  United  States  Corporations 

Art.  4.  The  return  required  by  article  3  of  corporations,  joint-stock  com- 
panies or  associations,  or  insurance  companies,  organized  in  the  United 
States,  shall  be  made  on  Form  707,  to  be  supplied  by  this  department,  and 
shall  set  forth  the  following  particulars: 

(1)  Total  number  of  shares  of  stock  now  outstanding. 

(2)  Par  value  of  shares. 

(3)  Par  value  of  total  capital  stock  outstanding. 

(4)  Amount  of  surplus. 

(5)  Amount  of  undivided  profits. 

(6)  Case  I. — Average  market  value  per  share  during  preceding  fiscal 
year,  if  stock  is  listed  on  an  exchange. 

Case  II. — If  stock  is  not  listed  on  an  exchange,  average  market  value 
per  share  computed  from  sales  made  during  preceding  fiscal  year. 

Case  III. — If  stock  is  not  listed  on  any  exchange  and  no  sales  have  been 
made  during  preceding  fiscal  year,  or  if  sales  have  been  made  and  the  price 
is  unknown,  the  fair  average  value  of  the  stock  may  be  estimated  from  the 
following  data  set  forth  on  the  return:  Amount  of  surplus,  amount  of  un- 
divided profits,  nature  of  business,  estimated  earning  capacity,  average 


2  QO  APPENDIX  C 

dividends  per  share  paid  during  preceding  five  years,  average  profits  pei 
share  earned  during  preceding  five  years. 

(7)  Total  number  of  shares  of  stock  outstanding  on  last  day  of  fiscal  year. 

(8)  Fair  value  of  total  capital  stock  for  preceding  fiscal  year. 

(9)  Deduction  allowed  by  law  of  $99,000. 

(10)  Amount  of  fair  value  of  stock  over  $99,000  upon  which  tax  should 
be  computed. 

(n)  Tax  at  rate  of  50  cents  per  year  for  each  full  $1,000. 

(12)  Amount  of  munitions  tax,  if  any,  paid  under  Title  III  of  this  act 
since  making  the  last  previous  return. 

(13)  Amount  of  tax  due. 

Form  of  return  for  foreign  corporations 
Substance  of  return  required  of  foreign  corporations 

Art.  5.  The  return  required  by  article  3  of  foreign  corporations,  joint- 
stock  companies  or  associations,  or  insurance  companies,  having  capital 
invested  in  the  transaction  of  its  business  in  the  United  States,  shall  be 
made  on  Form  708,  to  be  supplied  by  this  department,  and  shall  set  forth 
the  following  particulars: 

(1)  Amount  of  capital  invested  in  the  United  States. 

(2)  Amount  of  capital  invested  in  foreign  countries. 

(3)  Total  amount  of  capital  invested  in  the  corporation,  both  in  the 
United  States  and  elsewhere. 

(4)  Percentage  of  capital  invested  in  the  United  States. 

(5)  Percentage  of  $99,000  allowed  to  be  deducted  under  the  law. 

(6)  Amount  of  capital  upon  which  tax  should  be  computed. 

(7)  Tax  at  the  rate  of  50  cents  per  year  for  each  full  $1,000. 

(8)  Amount  of  munitions  tax,  if  any,  paid  under  Title  III  of  this  act 
since  making  the  last  previous  return. 

(9)  Amount  of  tax  due. 

Computation  of  Tax 
United  States  corporations 

Art.  6.  Sec.  I.  Companies  or  associations  organized  in  the  United  States 
for  profit. — The  tax  on  companies  or  associations  having  a  capital  stock 
represented  by  shares  is  imposed  on  the  fair  average  value  for  the  preceding 
year  and  not  the  face  or  par  value  of  the  capital  stock.  The  fair  value  of 
the  capital  stock  shall  be  ascertained  as  follows: 


Stock  listed  on  exchange 

(a)  Case  I. — If  the  stock  is  listed  on  any  exchange  its  fair  value  will  be 
determined  by  adding  the  quoted  highest  bid  price  for  the  stock  on  the  last 
business  day  of  each  month  during  the  preceding  fiscal  year  (or  if  no  bid 
price  was  quoted  on  the  last  day  then  the  latest  day  in  the  month  on  which 


CAPITAL  STOCK  TAX  REGULATIONS  2QI 

a  bid  was  quoted),  and  dividing  by  12,  the  result  being  the  average  bid 
price  per  share  for  that  year. 

Stock  not  listed,  but  of  which  sales  have  been  made 

(b)  Case  II. — If  the  stock  is  not  listed  on  any  exchange,  but  sales  thereof 
have  been  actually  made,  and  the  price  paid  for  the  stock  is  known  to  the 
officer  making  the  return,  or  can  be  discovered  by  him,  the  average  price 
at  which  sales  were  made  during  the  preceding  fiscal  year  shall  be  the  de- 
termining factor  in  ascertaining  the  fair  value  per  share. 

(In  the  foregoing  two  cases  the  actual  fair  value  of  the  stock  is  ascer- 
tainable  from  the  facts  without  the  necessity  of  making  an  estimate.) 

Cases  in  which  fair  average  value  of  stock  shall  be  estimated 

(c)  Case  III. — If  Case  I  and  Case  II  can  not  be  applied,  viz.,  the  stock 
is  not  listed  on  any  exchange,  and  no  actual  sales  have  been  made  during 
the  preceding  fiscal  year,  or  if  the  price  at  which  sales  have  been  made  is 
not  known  to  the  officer  making  the  return  the  fair  average  value  of  the 
capital  stock  shall  be  estimated,  and  the  surplus  and  undivided  profits  for 
the  preceding  fiscal  year  will  be  taken  into  consideration  as  required  by 
the  statute,  as  well  as  the  nature  of  the  business,  its  earning  capacity  and 
average  dividends  paid,  or  profits  earned  during  the  preceding  five  years. 

Fair  value  of  total  capital  stock  outstanding 

(d)  The  fair  value  per  share  ascertained  or  estimated  as  above  multiplied 
by  the  number  of  shares  outstanding  will  give  the  fair  value  of  the  stock 
for  taxation  purposes. 

Deduction  of  $99,000 

(e)  From  this  total  will  be  deducted  the  sum  of  $99,000,  the  exemption 
allowed  by  law,  and  the  tax  will  be  laid  upon  the  balance  at  the  rate  of  50 
cents  for  each  full  $1,000  of  the  remainder. 

Tax  due  January,  1917 

(/)  Upon  the  returns  to  be  made  during  January,  1917,  for  the  six  months 
ending  June  30,  1917,  the  tax  due  will  be  25  cents  per  $1,000  of  such  re- 
mainder. 

Deduction  of  munitions  tax 

(g)  From  the  tax  due  as  so  determined  will  be  deducted  the  amount  of 
munitions  tax,  if  any,  actually  paid  since  making  the  last  previous  return. 
As  the  special  excise  tax  on  capital  stock  is  due  in  January,  1917,  and  the 
munitions  tax  will  not  be  determined  and  assessed  until  March  or  April, 
no  deductions  for  munitions  tax  will  be  allowed  on  the  January,  1917,  return. 
Deductions,  however,  will  be  allowed  on  the  July,  1917,  return  for  munitions 
taxes  actually  paid  prior  to  that  date. 


2Q2  APPENDIX  C 

SEC.  2.  Corporations,  joint-stock  companies  or  associations,  or  insurance 
companies,  organized  for  profit  under  the  laws  of  any  foreign  country  and  en- 
gaged in  business  in  the  United  States. 

Foreign  corporations 

(a)  The  tax  imposed  on  such  companies  or  associations  shall  be  computed 
upon  the  actual  capital  invested  in  the  transaction  of  its  business  in  the 
United  States.  The  basis  of  taxation  is  the  average  amount  of  capital  so 
invested  during  the  preceding  fiscal  year. 

Deduction  of  proportion  of  $99,000  only  allowed  if  corporation  makes  return 
of  total  capital  invested 

(6)  The  exemption  from  the  amount  of  capital  invested  in  the  United 
States  equal  to  the  proportion  of  $99,000  as  the  amount  so  invested  bears 
to  the  total  amount  invested  in  the  transaction  of  business  in  the  United 
States  or  elsewhere  shall  only  be  allowed  a  company  or  association  which 
makes  return  to  the  Commissioner  of  Internal  Revenue,  under  these  regula- 
tions, of  the  amount  of  capital  invested  in  the  transaction  of  business  out- 
side of  the  United  States.  Thus  a  foreign  company  or  association  investing 
part  of  its  capital  in  the  transaction  of  business  in  the  United  States  shall 
be  liable  for  tax  in  the  amount  of  50  cents  for  each  $1,000  of  the  actual  capital 
invested  in  the  United  States, .  without  deduction  of  the  said  proportion 
of  $99,000,  unless  it  discloses  in  its  return  the  amount  of  capital  invested 
in  the  transaction  of  business  outside  of  the  United  States. 

Corporations  not  in  business  during  preceding  taxable  year 

SEC.  3.  Corporations  not  engaged  in  business  during  preceding  taxable  year. — 
This  tax  shall  not  be  imposed  upon  any  corporation,  joint-stock  company 
or  association,  or  insurance  company  not  engaged  in  business  during  the 
preceding  taxable  year,  or  in  the  case  of  the  taxable  period  ending  June  30, 
1917,  not  so  engaged  during  the  year  July  i,  1915,  to  June  30,  1916.  The 
tax  shall  be  computed  upon  each  full  value  of  $1,000  and  not  on  any  frac- 
tional part  thereof. 

Collection  of  tax 

Special  list,  Form  23C 

Art.  7.  On  account  of  the  impracticability  of  issuing  stamps  in  the  various 
amounts,  this  tax  will  be  collected  by  assessment  on  a  special  list  for  the 
months  of  January  and  July,  1917,  and  annually  thereafter  in  July.  Any 
delinquent  returns  made  in  February  or  other  months,  or  any  assessments 
for  delinquency  in  taxes,  may  be  listed  on  the  regular  list  Form  23,  and  col- 
lected in  the  usual  way. 

Returns  retained  by  collector 

(a)  Returns  listed  on  special  lists  will  be  retained  in  the  office  of  the  col- 
lector as  the  special  list  will  be  prepared  so  as  to  give  the  essential  data 
shown  by  the  return. 


CAPITAL  STOCK  TAX  REGULATIONS  293 

Returns  forwarded  to  commissioner 

(&)  Returns  listed  on  regular  lists  will  be  forwarded  to  this  office  with  the 
list  for  audit. 

Penalty  of  5  per  cent. 

(c)  Upon  failure  to  pay  the  tax  assessed  within  10  days,  after  notice  and 
demand,  a  penalty  of  5  per  cent,  of  the  tax  unpaid  and  interest  at  the  rate 
of  i  per  cent,  per  month  until  paid  shall  be  added  to  the  amount  of  such 
tax. 

Penalties 
Administrative  and  assessment  laws  applicable  to  this  law. 

Art.  8.  (a)  Under  section  409  it  is  provided  that  "all  administrative  or 
special  provisions  of  law,  including  the  law  relating  to  the  assessment  of 
taxes  so  far  as  applicable,  are  hereby  extended  to  and  made  a  part  of  Title 
IV,  and  every  person,  firm,  company,  corporation,  or  association  liable  to 
any  tax  imposed  by  this  title  shall  keep  such  records  and  render  under 
oath  such  statements  and  returns  as  shall  comply  with  such  regulations  as 
the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the  Secretary 
of  the  Treasury,  may  from  time  to  time  prescribe." 

Penalties  for  failure  to  make  return 

(b)  Any  company  or  association,  therefore,  subject  to  special  tax  under 
section  407  of  this  act,  which  fails  to  make  returns  during  the  months  of 
January,  1917,  and  July,  1917,  and  annually  in  July  thereafter,  will  be 
liable  to  the  penalties  imposed  by  section  3176,  Revised  Statutes,  as  amended 
by  section  16,  act  of  September  8, 1916,  which  reads  as  follows: 

Collector  may  make  the  return 

If  any  person,  corporation,  company,  or  association  fails  to  make  and 
file  a  return  or  list  at  the  time  prescribed  by  law,  or  makes,  wilfully  or  other- 
wise, a  false  or  fraudulent  return  or  list,  the  collector  or  deputy  collector 
shall  make  the  return  or  list  from  his  own  knowledge  and  from  such  informa- 
tion as  he  can  obtain  through  testimony  or  otherwise.  Any  return  or  list 
so  made  and  subscribed  by  a  collector  or  deputy  collector  shall  be  prima 
facie  good  and  sufficient  for  all  legal  purposes. 

Extension  of  30  days 

If  the  failure  to  file  a  return  or  list  is  due  to  sickness  or  absence  the  col- 
lector may  allow  such  further  time,  not  exceeding  thirty  days,  for  making 
and  filing  the  return  or  list  as  he  deems  proper. 

Fifty  per  cent,  penalty 

The  Commissioner  of  Internal  Revenue  shall  assess  all  taxes,  other  than 
stamp  taxes,  as  to  which  returns  or  lists  are  so  made  by  a  collector  or  deputy 


294  APPENDIX   C 

collector.  In  case  of  any  failure  to  make  and  file  a  return  or  list  within  the 
time  prescribed  by  law  or  by  the  collector,  the  Commissioner  of  Internal 
Revenue  shall  add  to  the  tax  fifty  per  centum  of  its  amount  except  that, 
when  a  return  is  voluntarily  and  without  notice  from  the  collector  filed  after 
such  time  and  it  is  shown  that  the  failure  to  file  it  was  due  to  a  reasonable 
cause  and  not  to  willful  neglect,  no  such  addition  shall  be  made  to  the  tax. 
In  case  a  false  or  fraudulent  return  or  list  is  willfully  made,  the  Commis- 
sioner of  Internal  Revenue  shall  add  to  the  tax  one  hundred  per  centum  of 
its  amount. 

The  amount  so  added  to  any  tax  shall  be  collected  at  the  same  time  and 
in  the  same  manner  and  as  part  of  the  tax  unless  the  tax  has  been  paid  be- 
fore the  discovery  of  the  neglect,  falsity,  or  fraud,  in  which  case  the  amount 
so  added  shall  be  collected  in  the  same  manner  as  the  tax. 

(c)  In  addition  to  the  penalties  imposed  by  section  3176,  Revised  Stat- 
utes, section  408  provides  as  follows: 

Specific  penalty 

Every  person  who  carries  on  any  business  or  occupation  for  which  special 
taxes  are  imposed  by  this  title,  without  having  paid  the  special  tax  therein 
provided,  shall,  besides  being  liable  to  the  payment  of  such  special  tax,  be 
deemed  guilty  of  a  misdemeanor,  and  upon  conviction  thereof  shall  pay  a 
fine  of  not  more  than  $500,  or  be  imprisoned  not  more  than  six  months,  or 
both,  in  the  discretion  of  the  court. 

W.  H.  OSBORN, 

Approved:  Commissioner  of  Internal  Revenue. 

WM.  P.  MALBURN, 
Acting  Secretary  of  the  Treasury. 

(T.  D.  2418) 

CITATIONS  FROM  DECISIONS  OF  THE  SUPREME  COURT  RE- 
GARDING "DOING  BUSINESS"  UNDER  CAPITAL-STOCK 
TAX,  ACT  OF  SEPTEMBER  8,  1916 

TREASURY  DEPARTMENT, 
OFFICE  OF  COMMISSIONER  OF  INTERNAL  REVENUE, 

Washington,  D.  C.,  December  15,  ip/tf.1 
To  COLLECTORS  OF  INTERNAL  REVENUE: 

The  following  decisions  made  in  cases  arising  under  the  corporation-tax 
Act  of  August  5,  1909,  will  be  followed  where  they  are  final  or  have  been  ac- 
quiesced in  by  the  department  in  similar  questions  arising  under  the  special 
excise  tax  imposed  by  section  407,  Title  IV,  act  of  September  8,  1916: 

I.  When  is  a  corporation  "engaged  in  business,"  "doing  business,"  or 
"transacting  business"  ?  [113096]. 

II.  "Massachusetts  trusts"  are  exempt  from  the  special  excise  tax 

[1f3097l. 

1  Released  for  publication  December  21,  1916. 


CAPITAL   STOCK   TAX   REGULATIONS  2Q5 

III.  Filing  of  returns  [fl  3098]. 

IV.  Foreign   corporations   transacting   business  in   the   United   States 

[K3099]. 

V.  Domestic  building  and  loan  associations  organized  and  operated  for 
mutual  purposes  and  without  profit  are  exempt  ffl  3100]. 

VI.  Insurance  companies  claiming  exemption  as  fraternal  beneficiary 
societies  [^  3101]. 

The  special  excise  tax  imposed  under  section  407  of  the  act  of  September  8, 
1916,  is  very  similar  in  some  respects  to  the  corporation-tax  act  of  August  5, 
1909,  and  therefore  the  following  court  decisions  rendered  under  that  act 
would  apply  to  the  present  law: 


WHEN  is  A  CORPORATION  "ENGAGED  IN  BUSINESS,"  "DOING  BUSINESS," 
OR  "TRANSACTING  BUSINESS"? 

Flint  v.  Stone  Tracy  Co.,  Cedar  Street  Co.  v.  Park  Realty  Co.  and  13  other 
cases  (220  U.  S.  107;  T.  D.  1685) 

In  these  cases  it  was  held  that  section  38,  act  of  August  5,  1909,  impos- 
ing a  special  excise  tax  on  corporations  was  constitutional,  and  further 
that  corporations  whose  business  is  principally  the  holding  and  manage- 
ment of  real  estate  are  actively  "engaged  in  business"  within  the  meaning 
of  that  statute. 

In  the  case  of  Cedar  Street  Co.  v.  Park  Realty  Co.  it  developed  that  the 
Park  Realty  Co.  was  organized  to  "work,  develop,  sell,  convey,  mortgage, 
or  otherwise  dispose  of  real  estate;  to  lease,  exchange,  hire,  or  otherwise 
acquire  property;  to  erect,  alter,  or  improve  buildings;  to  conduct,  operate, 
manage,  or  lease  hotels,  apartment  houses,  etc.;  to  make  and  carry  out  con- 
tracts in  the  manner  specified  concerning  buildings  .  .  .  and  generally  to 
deal  in,  sell,  lease,  exchange,  or  otherwise  deal  with  lands,  buildings,  and 
other  property,  real  or  personal,"  etc. 

The  court,  in  its  decision,  used  the  following  language: 

We  think  it  is  clear  that  corporations  organized  for  the  purpose  of  doing 
business,  and  actually  engaged  in  such  activities  as  leasing  property,  col- 
lecting rents,  managing  office  buildings,  making  investments  of  profits, 
or  leasing  ore  lands  and  collecting  royalties,  managing  wharves,  dividing 
profits,  and  in  some  cases  investing  the  surplus,  are  engaged  in  business 
within  the  meaning  of  this  statute,  and  in  the  capacity  necessary  to  make 
such  organizations  subject  to  the  law. 

Several  good  illustrations  of  what  constitutes  "engaging  in  business" 
are  cited  in  the  decision  of  the  court  in  these  cases. 

Zonne  v.  Minneapolis  Syndicate  et  al.  (220  U.  S.  187;  T.  D.  1687)— Pe- 
culiarity of  corporate  organization  exempting  it  from  special  excise  tax 

Where  a  corporation  originally  organized  for  the  purpose  of  owning  and 
renting  an  office  building  leased  the  property  for  130  years  and  reorganized 
and  practically  went  out  of  business,  its  sole  authority  being  to  hold  the 


296  APPENDIX   C 

title  subject  to  the  lease  and  to  receive  and  distribute  the  rentals  accruing 
thereunder  or  the  proceeds  of  sale  if  the  property  should  be  sold,  held  not 
liable  to  the  special  excise  tax  under  section  38  of  the  act  of  August  5,  1909. 

The  court  stated  in  this  case  as  follows: 

The  corporation  involved  in  the  present  case,  as  originally  organized, 
and  owning  and  renting  an  office  building,  was  doing  business  within  the 
meaning  of  the  statute  as  we  have  construed  it.  Upon  the  record  now  pre- 
sented we  are  of  opinion  that  the  Minneapolis  syndicate,  after  the  demise 
of  the  property  and  reorganization  of  the  corporation,  was  not  engaged  in 
doing  business  within  the  meaning  of  the  act.  It  had  wholly  parted  with 
control  and  management  of  the  property;  its  sole  authority  was  to  hold  the 
title  subject  to  the  lease  for  130  years,  to  receive  and  distribute  the  rentals 
which  might  accrue  under  the  terms  of  the  lease,  or  the  proceeds  of  any  sale 
of  the  land  if  it  should  be  sold.  The  corporation  had  practically  gone  out 
of  business  in  connection  with  the  property  and  had  disqualified  itself  by 
the  terms  of  reorganization  from  any  activity  in  respect  to  it.  We  are  of 
opinion  that  the  corporation  was  not  doing  business  in  such  wise  as  to  make 
it  subject  to  the  tax  imposed  by  the  act  of  1909. 

McCoach,  collector,  v.  Minehill  &  Schuylkill  Haven  Railroad  Co.  (228  U.  S. 
295;  T.  D.  1847) 

Leased  railroads. — A  railroad  corporation,  which  has  leased  its  property 
for  a  term  of  years  and  parted  with  its  control  and  management,  but  which 
maintains  its  corporate  organization  and  collects  rentals  from  the  lessee 
company  and  distributes  the  same  among  its  stockholders,  is  not  "engaged 
in  business"  within  the  meaning  of  the  corporation-tax  act  of  1909  and  is 
not  liable  for  taxes  thereunder,  notwithstanding  the  lease  provides  for 
recovery  of  the  property  in  case  of  default. 

Corporations  out  of  business. — When  the  corporation  owning  the  property 
has  gone  out  of  business  in  connection  therewith,  and  disqualified  itself 
from  any  activity  in  regard  to  it,  there  is  no  liability,  the  principle  being 
the  same  as  that  involved  in  the  case  of  Zonne  v.  Minneapolis  Syndicate 
(220  U.  S.  187),  which  is  held  to  govern  this  case. 

The  court  stated  in  this  case  as  follows: 

From  the  facts  as  stated  above  it  is  entirely  clear  that  the  Minehill  Co. 
was  not,  during  the  years  1909  and  1910,  engaged  at  all  in  the  business  of 
maintaining  or  operating  a  railroad,  which  was  the  prime  object  of  its  in- 
corporation. This  business,  by  the  lease  of  1896,  it  had  turned  over  to  the 
Reading  Co.  If  that  lease  had  been  made  without  authorization  of  law — 
it  may  be  that  for  some  purposes,  and  possibly,  for  the  present  purpose — 
the  lessee  might  be  deemed  in  law  the  agent  of  the  lessor;  or  at  least  the  lessor 
held  estopped  to  deny  such  agency.  But  the  lease  was  made  by  the  express 
authority  of  the  State  that  created  the  Minehill  Co.,  conferred  upon  it  its 
franchise,  and  imposed  upon  it  the  correlative  public  duties.  The  effect 
of  this  legislation  and  of  the  lease  made  thereunder  was  to  constitute  the 
Reading  Co.  the  public  agent  for  the  operation  of  the  railroad  and  to  prevent 
the  Minehill  Co.  from  carrying  on  business  in  respect  of  the  maintenance  and 


CAPITAL  STOCK  TAX  REGULATIONS  297 

operation  of  the  railroad  so  long  as  the  lease  shall  continue.  And  it  is  the 
Reading  Co.,  and  not  the  Minehill  Co.,  that  is  "doing  business"  as  a  rail- 
road company  upon  the  lines  covered  by  the  lease,  and  is  taxable  because 
of  it.  The  corporation-tax  law  does  not' contemplate  double  taxation  in 
respect  of  the  same  business. 

United  States  v.  Emery-Bird-Thayer  Realty  Co.  (237  U.  S.  28;  T.  D.  2188) 

Engaged  in  business. — The  lessor  corporation  was  not  carrying  on  or  doing 
business  within  the  meaning  of  the  law,  the  only  business  done  being  keeping 
up  its  corporate  organization  and  collecting  and  distributing  rent  received 
from  lessee  following  the  rule  laid  down  in  T.  D.  1847. 

The  court  states  as  follows: 

Being  of  opinion  that  the  District  Court  had  jurisdiction,  we  pass  to  the 
merits.  They  also  may  be  disposed  of  without  much  discussion.  The  line 
lies  between  Cedar  Street  Co.  v.  Park  Realty  Co.  (220  U.  S.  107,  170)  and 
Zonne  v.  Minneapolis  Syndicate  (220  U.  S.  187),  the  latter  case  being  carried 
perhaps  a  little  further  by  McCoach  v.  Minehill  &  Schuylkill  Haven  R.  R. 
Co.  (228  U.  S.  295).  We  are  of  opinion  that  this  case  is  governed  by  the  last 
two  and  that  the  decision  was  right.  The  question  is  rather  what  the  cor- 
poration is  doing  than  what  it  could  do  (228  U.  S.  205,  306),  but  looking 
even  to  its  powers,  they  are  limited  very  nearly  to  the  necessary  incidents 
of  holding  a  specific  tract  of  land.  The  possible  sale  of  the  whole  would  be 
merely  the  winding  up  of  the  corporation.  That  of  a  part  would  signify 
that  the  dry  goods  company  did  not  need  it.  The  claimants  characteristic 
charter  function  and  the  only  one  that  it  was  carrying  on  was  the  bare  re- 
ceipt and  distribution  to  its  stockholders  of  rent  from  a  specified  parcel  of 
land.  Unless  its  bare  existence  as  an  intermediary  was  doing  business,  it 
is  hard  to  imagine  how  it  could  be  less  engaged. 

Station's  Independence  (Ltd.)  v.  F.  W.  Howbert,  collector  (231  U.  S.  399; 

T.  D.   1913} 

Mining  companies. — Section  38,  act  of  August  5,  1909,  imposing  a  special 
excise  tax  on  corporations  applies  to  mining  companies. 

The  court  stated  as  follows: 

It  is  not  correct,  from  either  the  theoretical  or  the  practical  standpoint, 
to  say  that  a  mining  corporation  is  not  engaged  in  business,  but  is  merely 
occupied  in  converting  its  capital  assets  form  one  form  into  another.  The 
?:.\e  outright  of  a  mining  property  might  be  fairly  described  as  a  mere  con- 
version of  the  capital  from  land  into  money.  But  when  a  company  is  digging 
pits,  sinking  shafts,  tunneling,  drifting,  stoping,  drilling,  blasting,  and  hoist- 
ing ores,  it  is  employing  capital  and  labor  in  transmuting  a  part  of  the 
realty  into  personalty  and  putting  it  into  marketable  form.  The  very  proc- 
ess of  mining  is,  in  a  sense,  equivalent  in  its  results  to  a  manufacturing 
process.  And,  however  the  operation  shall  be  described,  the  transaction 
is  indubitably  "business"  within  the  fair  meaning  of  the  act  of  1909;  and 
the  gains  derived  from  it  are  properly  and  strictly  from  that  business;  for 


2Q8  APPENDIX  C 

"income"  may  be  defined  as  the  gain  derived  from  capital,  from  labor,  or 
from  both  combined,  and  here  we  have  combined  operations  of  capital  and 
labor.  As  to  the  alleged  inequality  of  operation  between  mining  corporations 
and  others,  it  is  of  course  true  that  the  revenues  derived  from  the  working 
of  mines  result  to  some  extent  in  the  exhaustion  of  the  capital.  But  the 
same  is  true  of  the  earnings  of  the  human  brain  and  hand  when  unaided  by 
capital,  yet  such  earnings  are  commonly  dealt  with  in  legislation  as  in- 
come. .  .  .  That  mining  companies  are  doing  business,  within  the  fair 
intent  and  meaning  of  this  clause,  seems  to  us  entirely  plain,  for  reasons 
already  given. 

Rio  Grande  Junction  Railway  Co.  v.  United  States,  Case  No.  32746,  Court  of 
Claims.    (T.  D.  2345.}    (Decided  May  26,  1916) 

The  Minehill  decision  in  the  Supreme  Court. — Decision  in  the  Minehill 
case  (228  U.  S.  295;  T.  D.  1847)  does  not  apply  where  a  corporation  is  or- 
ganized for  the  ostensible  purpose  of  building  and  operating  a  railroad  and 
leases  the  road  before  it  is  built. 

Corporations  organized  to  build  and  lease  property. — If  the  purpose  for  which 
it  was  organized  was  to  build  and  lease  property,  the  rents  derived  from  such 
lease  are  taxable,  even  though  thereby  the  corporation  leases  all  the  property 
and  of  necessity  goes  out  of  all  corporate  business  excepting  the  collection 
and  distribution  of  the  rents. 

The  court  stated: 

We  do  not  think,  however,  the  case  presented  by  the  plaintiff  comes 
within  the  cases  cited,  for  reasons  which  we  will  proceed  to  give.  Its  articles 
of  incorporation  show  that  it  was  designed  as  a  junction  company;  that  is 
to  say,  that  it  was  intended  as  a  connecting  line  between  other  lines 
named.  The  contract  for  a  lease  was  executed  within  six  months  after  the 
date  of  its  articles  of  incorporation,  and  by  its  terms  it  may  be  well  inferred 
that  the  lessees  guaranteed  the  payment  of  all  funds  borrowed  for  its  con- 
struction, and  from  the  latter  fact  it  may  well  be  inferred  that  its  construc- 
tion was  not  begun  until  these  bonds  were  issued  and  their  payment  guar- 
anteed. It  does  does  not  appear  that  this  company  ever  purchased  or 
owned  any  rolling  stock  or  anything  pertaining  to  the  operation  of  a  rail- 
road, except  its  track  and  appurtenances  necessary  for  the  use  of  rolling 
stock.  As  soon  as  said  junction  railroad  was  completed  the  lessees  took 
possession  of  it  and  have  been  operating  it  ever  since.  Shortly  after  it  was 
incorporated  and  before  the  execution  of  the  agreement  the  General  Assembly 
of  Colorado  authorized  the  plaintiff  to  lease  its  railroad  (not  then  built), 
which  must  have  been  for  the  purpose  of  making  doubly  certain  what  the 
articles  of  incorporation  already  seemed  to  allow.  These  facts  lead  to  but 
one  conclusion,  and  that  is  that  the  "business"  for  which  the  plaintiff  was 
incorporated  was  to  build  and  lease  a  junction  railroad  and  enjoy  the  profits 
of  that  business  alone.  It  never  equipped  a  railroad  for  use  as  such  and 
never  intended  to,  as  all  the  facts  show.  If  plaintiff  is  allowed  to  evade 
payment  of  the  corporation  tax  in  this  way,  we  see  no  reason  why  this 
practice  can  not  be  followed  in  the  construction  hereafter  of  every  railroad, 


CAPITAL   STOCK   TAX   REGULATIONS  2QQ 

and  thus  evade  the  payment  of  a  large  percentage  of  the  tax  upon  the  net 
income  of  railway  corporations. 

There  are  cited  below  several  decisions  of  the  lower  courts,  construing 
the  language  of  the  Supreme  Court  in  the  above  cases  and  further  denning 
the  terms  "doing  business,"  "engaged  in  business,"  and  "transaction  of 
business":  Baumbach,  collector,  v.  Sargent  Land  Co.  et  al.  (219  Fed.  31), 
(now  before  the  Supreme  Court  on  writ  of  certiorari);  Lewellyn,  collector, 
v.  Pittsburgh,  B.  &  L.  E.  R.  R.  Co.  et  al.  (222  Fed.  177);  Miller,  collector, 
v.  Snake  River  Valley  R.  R.  Co.  (223  Fed.  946);  Traction  Co.  v.  Collectors 
of  Internal  Revenue  (six  cases)  (233  Fed.  984),  (decision  of  District  Court 
printed  in  T.  D.  2000  reversed);  Waterbury  Gaslight  Co.  v.  Walsh  (228 
Fed.  54);  McCoach,  collector,  v.  Continental  Passenger  Railway  Co.  of 
Philadelphia  (233  Fed.  976);  State  Line  &  S.  R.  Co.  v.  Davis  (228  Fed.  246); 
Wilkes-Barre  &  W.  V.  Traction  Co.  v.  Davis,  collector  (214  Fed.  511); 
Maxwell  v.  Abrast  Realty  Co.  (218  Fed.  457);  United  States  v.  Nipissing 
Mines  Co.  (206  Fed.  431). 

Corporations  which  are  not  "engaged  in  business,"  "doing  business"  or 
"transacting  business,"  as  construed  under  the  language  of  the  courts  in 
the  above  decisions  are  not  subject  to  the  special  excise  tax  imposed  under 
section  407  of  the  act  of  September  8, 1916. 

n 

"MASSACHUSETTS  TRUSTS"  ARE  EXEMPT  FROM  THE  SPECIAL  EXCISE  TAX 
Eliot  v.  Freeman  et  al.  (220  U.  S.  178;  T.  D.  1686) 

Intent  of  Congress. — It  was  the  intention  of  Congress  to  embrace  within 
the  statute  imposing  a  special  excise  tax  on  corporations  only  such  corpora- 
tions and  joint-stock  associations  as  are  organized  under  some  statute  or 
derive  from  that  source  some  quality  or  benefit  not  existing  at  the  common 
law. 

The  court  stated  as  follows: 

The  two  cases  now  under  consideration  embrace  trusts  which  do  not 
derive  any  benefit  from  and  are  not  organized  under  the  statutory  laws  of 
Massachusetts.  Joint-stock  companies  of  the  statutory  character  are  not 
known  to  the  laws  of  that  Commonwealth.  Ricker  v.  American  Tea  Co. 
(140  Mass.  346).  These  trusts  do  not  have  perpetual  succession,  but  end 
with  lives  in  being  and  20  years  thereafter. 

Entertaining  the  view  that  it  was  the  intention  of  Congress  to  embrace 
within  the  corporation-tax  statute  only  such  corporations  and  joint-stock 
associations  as  are  organized  under  some  statute  or  derive  from  that  source 
some  quality  or  benefit  not  existing  at  the  common  law,  we  are  of  opinion 
that  the  real-estate  trusts  involved  in  these  two  cases  are  not  within  the 
terms  of  the  act.  In  that  view  the  decrees  in  both  cases  will  be  reversed 
and  the  same  remanded  to  the  Circuit  Court  of  the  United  States  for  the 
District  of  Massachusetts,  with  directions  to  overrule  the  demurrers  and 
for  further  proceedings  consistent  with  this  opinion. 


300  APPENDIX  C 

III 

NECESSITY  FOR  THE  FILING  OF  A  RETURN 
United  States  v.  Military  Construction  Co.  (204  Fed.  153;  T.  D.  1774} 

Returns. — Corporations  having  a  net  income  of  $5,000  or  less  are  not 
exempt  from  the  requirement  that  a  return  be  made  to  the  collector  of  the 
district  in  which  such  corporation  has  its  principal  place  of  business. 

The  court  stated  as  follows: 

The  return  required  is  a  somewhat  complicated  one.  It  consists  of  eight 
sections,  the  proper  interpretation  of  which  controls  the  determination  of 
what  the  net  income  may  be.  This  is  a  matter  for  the  exercise  of  the  of- 
ficial judgment  and  discretion  of  the  revenue  department.  In  order  that 
it  may  exercise  such  judgment  and  discretion  it  must  have  the  facts  before 
it.  The  officers  of  the  corporation  and  those  of  the  revenue  department 
may  differ  as  to  the  ultimate  effect  of  such  facts. 

This  ruling  with  regard  to  filing  returns  is  also  laid  down  in  United  States 
v.  Acorn  Roofing  Co.  and  four  other  corporations  (204  Fed.  157;  T.  D.  1784). 

IV 

FOREIGN  CORPORATIONS  TRANSACTING  BUSINESS  IN  THE  UNITED  STATES 
Laurentide  Co.  (Ltd.)  v.  Durey,  collector  (231  Fed.  223;  T.  D.  2346) 

Liability  of  foreign  corporation — "Doing  business" — "Transacting  busi- 
ness"— "Engaged  in  business." — Under  the  revenue  act  of  August  5,  1909, 
taxing  the  net  income  of  foreign  corporations  engaged  in  business  in  the 
United  States,  and  under  the  income-tax  law  of  October  3,  1913,  taxing 
such  income  of  such  corporations  accruing  from  business  transacted  and 
capital  invested  within  the  United  States,  where  a  Canadian  corporation 
making  news  print  paper  sent  agents  into  the  United  States  to  solicit  pur- 
chasers for  its  product,  paying  their  expenses,  hiring  desk  room  in  the  United 
States,  empowering  the  salesmen  to  make  written  contracts,  in  part  in  the 
United  States,  subject  to  the  corporation's  approval  in  Canada,  and,  when 
approved,  to  deliver  the  contracts,  paying  rent,  storage  charges  on  paper 
snipped  into  the  United  States,  and  also  for  work  done  by  checks  drawn 
on  a  bank  in  the  United  States  where  the  company  kept  its  funds  received 
for  goods  delivered  in  the  United  States  to  purchasers,  and  then,  to  perform 
its  written  contracts,  shipped  paper  consigned  to  itself  in  the  United  States 
to  different  points,  where  it  hired  storage  rooms,  and  had  the  paper  de- 
livered to  itself  at  such  rooms,  where  it  stored  it  in  its  own  name  and  at  its 
own  risk  pending  delivery,  doing  so  for  its  own  convenience  and  to  insure 
delivery  according  to  contract,  also  shipping  into  the  United  States  and 
storing  in  such  manner  paper  to  meet  anticipated  demands,  such  Canadian 
company  "did  business"  in  the  United  States,  and  "engaged  in  business" 
therein,  and  also  "transacted  business"  in  the  United  States,  so  that  it 
was  liable  to  taxation  under  both  acts. 

The  court  stated: 

Appropriating  the  idea  of  Mr.  Justice  Peckham  expressed  in  Pennsyl- 


CAPITAL  STOCK  TAX  REGULATIONS  301 

vania  L.  M.  F.  I.  Co.  v.  Meyer  (197  U.  S.  at  p.  415;  25  Sup.  Ct.  483;  42 
L.  Ed.  810),  I  think  it  would  be  somewhat  difficult  for  the  Laurentide 
Co.  (Ltd.),  or  its  able  attorney,  to  describe  what  it  was  doing  in  the  United 
States  if  it  was  not  doing,  carrying  on,  and  transacting  business  therein 
when  there  receiving  large  quantities  of  news  paper  consigned  to  itself  and 
storing  it,  hiring  and  paying  for  storage  room  therefor,  delivering  it  to  cus- 
tomers, purchasers  thereof,  soliciting  contracts  by  agents  for  the  purchase 
and  supply  of  same,  renting  and  paying  rent  for  a  room  for  doing  the  busi- 
ness, depositing  and  collecting  the  checks  received  in  payment,  and  paying 
the  expenses  of  the  business  therefrom,  all  done  in  the  State  of  New  York 
in  the  United  States.  It  was  not  necessary  that  the  contracts  should  have 
been  made  wholly  in  the  United  States.  Pennsylvania  Life  Insurance  Co. 
v.  Meyer  (197  U.  S.  407,  414;  25  Sup.  Ct.  483;  49  L.  Ed.  810),  or  that  their 
execution  or  performance  should  have  been  wholly  in  the  United  States. 


DOMESTIC  BUILDING  AND  LOAN  ASSOCIATIONS  ORGANIZED  AND  OPERATED 
FOR  MUTUAL  PURPOSES  AND  WITHOUT  PROFIT  ARE  EXEMPT 

Herald,  collector,  v.  Park  View  Building  and  Loan  Association  (210  Fed.  577; 

T.  D.  1941) 

Construction  of  clause. — The  words  "no  part  of  the  net  income  of  which 
inures  to  the  benefit  of  any  private  stockholder  or  individual"  do  not  apply 
to  domestic  building  and  loan  associations  operated  for  the  mutual  benefit 
of  members. 

Exemption. — Building  and  loan  associations  operated  exclusively  for 
the  mutual  benefit  of  their  members  are  exempt. 

Issuance  of  prepaid  stock. — The  issuance  of  prepaid  stock  does  not  de- 
stroy mutuality  (affirming  203  Fed.  876). 

VI 

INSURANCE  COMPANIES  CLAIMING  EXEMPTION  AS  FRATERNAL  BENEFICIARY 

SOCIETIES 

Commercial  Travelers'  Life  and  Accident  Association  v.  Rodway,  collector 
(235  Fed.  370;  T.  D.  1918} 

Insurance  companies. — The  corporation  in  question  is  an  insurance  com- 
pany within  the  meaning  of  the  law  and  subject  to  the  tax  imposed  by 
section  38,  act  of  August  5,  1909. 

Fraternal  beneficiary  societies. — There  is  no  exemption  in  the  law  in  favor 
of  insurance  companies  other  than  fraternal  beneficiary  societies  operating 
under  the  lodge  system  (see  T.  D.  1738).  Fraternal  beneficiary  societies 
defined. 

Inasmuch  as  the  basis  of  tax  is  the  fair  value  of  the  stock  of  a  corporation, 
mutual  insurance  companies  and  other  associations  not  having  capital 


302  APPENDIX  C 

stock  represented  by  shares  will  also  be  exempt  from  tax,  in  the  absence 
of  a  basis  for  the  computation  of  the  tax. 

Respectfully, 

W.  H.  OSBORN, 

Commissioner  of  Internal  Revenue. 
Approved: 
W.  G.  McADOO, 
Secretary  of  the  Treasury. 


(T.  D.  2423) 

SPECIFIC  RULINGS  MADE  BY  THIS  OFFICE  IN  ANSWER  TO 
QUESTIONS  ARISING  UNDER  THE  SPECIAL  EXCISE  TAX 
IMPOSED  BY  SECTION  407  OF  THE  ABOVE  ACT 

I.  ESTIMATING  FAIR  VALUE  OF  CAPITAL  STOCK. 
II.  COMPUTING  FAIR  VALUE  OF  CAPITAL  STOCK  WHEN  SALES  HAVE  BEEN 

MADE. 

III.  CHARACTER  OF  THE  EXCISE  TAX.    CORPORATIONS  LIABLE. 

TREASURY  DEPARTMENT, 
OFFICE  OF  COMMISSIONER  OF  INTERNAL  REVENUE, 

Washington,  D.  C.,  December  30,  ipid. 
To  COLLECTORS  OF  INTERNAL  REVENUE: 

i.  The  following  suggestions  have  been  made  regarding  the  method  of 
estimating  the  fair  value  of  stock  under  Case  III,  Item  6,  on  Form  707 : 

(a)  Where  the  capital  stock  of  a  corporation  is  worth  $100  per  share  par 
value  and  the  corporation  reports  10,000  shares,  having  a  total  value  of 
$1,000,000,  and  also  reports  a  surplus  of  $500,000,  and  undivided  profits 
of  $50,000,  the  book  value  of  such  stock  would  be  $1,550,000.  This  should 
be  taken  as  the  basis  of  the  approximate  value  of  the  stock  per  share  ($155) 
unless  by  reason  of  earning  capacity  the  real  value  is  in  excess  of  the  book 
value,  or  unless  for  any  reason  the  book  value  is  fictitious  and  is  shown  by 
over-estimating  the  value  of  assets. 

(6)  If  the  "average  profits  per  share  earned  during  preceding  five  years" 
indicate  an  "estimated  earning  capacity"  in  excess  of  the  book  value,  the 
fair  value  of  the  capital  stock  may  be  based  upon  a  reasonable  return  on  cap- 
ital invested,  dependent  on  the  hazards  of  the  business  and  what  prices  the 
stock  of  corporations  engaged  in  a  similar  character  of  business  brings  in  the 
open  market. 

(c)  If  the  book  value  is  fictitious  and  is  shown  by  over-estimating  the  cap- 
ital assets,  this  fact  should  be  fully  explained,  either  on  the  return  or  in  a 
statement  attached  thereto,  and  may  be  given  allowance  in  determining  the 
fair  value  of  stock  where  the  "average  profits  per  share  earned  during  pre- 
ceding five  years"  and  "earning  capacity"  are  exceedingly  low. 

(d)  The  "average  dividends  per  share  paid  during  preceding  five  years" 
are  stated  merely  for  the  information  of  this  office  in  a  case  where  a  corpora- 
tion shows  an  earning  capacity  but  states  no  surplus  or  undivided  profits. 


CAPITAL   STOCK  TAX  REGULATIONS  303 

(e)  One  return  submitted  by  a  lumber  company  for  examination  showed 
a  surplus  of  $257,700,  but  stated  that  it  was  "not  earned."  In  view  of  the 
fact  that  the  total  profits  of  this  company  for  the  last  four  years  of  operation 
only  amounted  to  $22,709.19,  and  it  had  paid  no  dividends  within  the  last 
five  years,  and  its  earning  capacity  was  practically  nothing,  the  corporation 
was  advised  to  file  a  statement,  explaining  how  the  surplus  was  acquired, 
and  if  it  was  real  or  fictitious  owing  to  the  inflated  valuation  of  assets  on  the 
books.  The  fair  value  of  the  stock  of  this  company,  which  was  estimated 
on  the  return  at  par,  $100  per  share,  would  largely  depend  upon  the  value  of 
its  assets,  especially  the  surplus  of  $257,700.  In  other  words,  if  the  capital 
stock  of  $450,000,  the  surplus  of  $257,700,  and  the  undivided  profits  of 
$22,708.19,  were  divided  up  at  the  present  time,  would  the  corporation  pay 
$162  per  share  to  each  of  the  stockholders,  that  being  approximately  the 
book  value? 

(/)  A  return  filed  by  a  Cotton  Yarn  Manufacturing  Corporation  showing 
average  profits  for  the  last  five  years  of  $15,949.45  on  capital  stock  of 
$200,000,  stated  an  estimated  value  under  Case  III  of  $70  per  share.  An 
industrial  corporation  of  this  character  stating  the  fair  value  of  its  stock  at 
$70  upon  a  return  showing  an  earning  capacity  of  seven  to  eight  per  cent., 
is  considered  fair,  in  view  of  the  speculative  character  of  its  business. 

(g)  The  Collectors  may  make  notations  at  the  foot  of  special  lists,  Form 
23C,  of  any  exceptional  cases  in  which  specific  rulings  of  the  Department 
are  desired,  and  if  it  is  necessary  for  this  ofike  to  make  an  examination  of 
the  return,  statements,  or  affidavits  of  officers  of  the  corporation,  the  Col- 
lectors will  be  asked  to  forward  them  for  that  purpose. 

(A)  Where  a  holding  company  owns  all  the  stock  of  several  subsidiary 
corporations  which  is  not  listed  on  any  exchange  or  which  has  not  been 
sold  in  the  last  fiscal  year,  it  has  been  held  that  the  fair  value  of  the  stock 
of  such  subsidiary  companies  may  be  estimated  from  the  market  value  of 
the  total  capital  stock  of  the  holding  company  (the  parent  corporation)  by 
apportionment  of  the  fair  value  of  the  total  capital  stock  of  the  holding  cor- 
porations among  the  subsidiary  companies.  This  does  not  of  course  relieve 
the  holding  company  from  its  liability  to  the  special  excise  tax,  the  average 
fair  value  of  the  stock  of  which  can  probably  be  computed  under  Case  I 
or  II. 

II.  Corporations  estimating  the  fair  value  of  their  stock  under  Case  II, 
Item  6,  on  Form  707,  will  comply  strictly  with  the  provisions  in  the  regu- 
lations by  taking  "the  average  price  at  which  sales  were  made  during  the 
preceding  fiscal  year"  and  not  the  average  selling  price  per  share.    Thus, 
if  ten  shares  were  sold  at  $100  and  one  thousand  shares  were  sold  at  $70, 
the  "average  price  at  which  sales  were  made"  would  be  $85.    The  average 
selling  price  in  such  case  would  be  $70.29,  but  this  price  will  not  be  accepted 
as  an  average  fair  value.    Corporations  protesting  against  the  computation 
of  the  value  of  stock  on  this  basis  may  file  a  statement  with  the  return  on 
Form  707  setting  forth  the  facts  in  detail  and  requesting  the  Collector  to 
bring  the  case  to  the  attention  of  this  ofike  by  a  notation  on  the  special  list, 
Form  23C,  when  it  is  forwarded  to  the  Department  for  audit. 

III.  From  correspondence  reaching  this  office  there  appears  to  be  a  general 


304  APPENDIX  C 

lack  of  understanding  of  the  character  and  scope  of  the  special  excise  tax 
imposed  upon  corporations  by  this  act. 

This  tax  is  an  excise  tax  on  the  privilege  of  doing  business  similar  to  occu- 
pational taxes  imposed  on  individuals,  except  that  instead  of  a  flat  tax  the 
amount  of  tax  is  measured  by  the  average  value  of  the  stock  during  the  pre- 
ceding year.  Being  a  privilege  or  occupational  tax,  it  is  payable  in  advance 
for  a  period  from  the  time  the  Act  goes  into  effect  to  the  end  of  the  fiscal 
year  and  annually  thereafter  in  July,  the  beginning  of  the  Government's 
fiscal  year.  The  tax  is  payable  to  the  Collector  at  any  time  after  Jan.  i, 
1917,  but  penalties  for  non-payment  do  not  attach  until  ten  days  after  notice 
and  demand  therefor  has  been  served  by  the  Collector  upon  the  tax-payer. 

It  is  a  condition  precedent  that  the  corporation  to  be  liable  must  have  been 
engaged  in  business  during  the  preceding  taxable  (fiscal)  year.  This  means, 
however,  not  that  it  must  have  been  engaged  in  business  during  the  entire 
year,  but  at  some  time  in  the  year,  and  the  length  of  time  has  no  bearing 
upon  the  amount  of  tax  due.  That  is  found  by  ascertaining  the  actual  aver- 
age market  value  of  the  stock  from  known  sales,  or  estimating  such  value 
for  the  preceding  taxable  year,  which,  in  the  case  of  the  return  due  in  Jan., 
1917,  is  the  Government's  fiscal  year  from  July  i,  1915,  to  June  30,  1916. 

Respectfully, 

G.  E.  FLETCHER, 
Acting  Commissioner. 


APPENDIX  D 

SPECIAL  EXCISE  TAX  ON  CORPORATIONS  l 

ENACTED  AUGUST  5,  1909 
(REPEALED  BY  ACT  OF  OCTOBER  3,  1913) 

SEC.  38.  That  every  corporation,  joint-stock  company  or  association, 
organized  for  profit  and  having  a  capital  stock  represented  by  shares,  and 
every  insurance  company,  now  or  hereafter  organized  under  Corpora- 
the  laws  of  the  United  States  or  of  any  State  or  Territory  of  tions  Tax- 
the  United  States  or  under  the  Acts  of  Congress  applicable  able, 
to  Alaska  or  the  District  of  Columbia,  or  now  or  hereafter  organized  under 
the  laws  of  any  foreign  country  and  engaged  in  business  in  any  State  or 
Territory  of  the  United  States  or  in  Alaska  or  in  the  District  of  Columbia, 
shall  be  subject  to  pay  annually  a  special  excise  tax  with  respect  to  the  carry- 
ing on  or  doing  business  by  such  corporation,  joint-stock  company  or  asso- 
ciation, or  insurance  company,  equivalent  to  one  per  centum  upon  the  entire 
net  income  over  and  above  five  thousand  dollars  received  by  it  from  all 
sources  during  such  year,  exclusive  of  amounts  received  by  it  as  dividends 
upon  stock  of  other  corporations,  joint-stock  companies  or  associations,  or 
insurance  companies,  subject  to  the  tax  hereby  imposed;  or  if  organized 
under  the  laws  of  any  foreign  country,  upon  the  amount  of  net  income  over 
and  above  five  thousand  dollars  received  by  it  from  business  transacted 
and  capital  invested  within  the  United  States  and  its  Territories,  Alaska, 
and  the  District  of  Columbia  during  such  year,  exclusive  of  amounts  so 
received  by  it  as  dividends  upon  stock  of  other  corporations,  joint-stock  com- 
panies or  associations,  or  insurance  companies,  subject  to  the  tax  hereby 
imposed:  Provided,  however,  That  nothing  in  this  section  con-  j?xemot 
tained  shall  apply  to  labor,  agricultural  or  horticultural  or- 
ganizations, or  to  fraternal  beneficiary  societies,  orders,  or  associations 
operating  under  the  lodge  system,  and  providing  for  the  payment  of  life, 
sick,  accident,  and  other  benefits  to  the  members  of  such  societies,  orders 
or  associations,  and  dependents  of  such  members,  nor  to  domestic  building 
and  loan  associations,  organized  and  operated  exclusively  for  the  mutual 
benefit  of  their  members,  nor  to  any  corporation  or  association  organized 
and  operated  exclusively  for  religious,  charitable,  or  educational  purposes, 
no  part  of  the  net  income  of  which  inures  to  the  benefit  of  any  private  stock- 
holder or  individual. 

1  For  reference  to  this  law  in  the  ascertainment  of  net  income  of  corpora- 
tions for  prewar  period  (years  1911  and  1912)  under  the  Excess  Profits 
Tax  Law,  see  page  122. 


306  APPENDIX  D 

Second.  Such  net  income  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  the  income  of  such  corporation,  joint-stock  company  or  associa- 
"  Net  In-  tion,  or  insurance  company,  received  within  the  year  from  all 
come  "  sources,  (first)  all  the  ordinary  and  necessary  expenses  actually 

Defined.  paid  within  the  year  out  of  income  in  the  maintenance  and 
operation  of  its  business  and  properties,  including  all  charges  such  as  rentals 
or  franchise  payments,  required  to  be  made  as  a  condition  to  the  continued 
Expenses,  use  or  possession  of  property;  (second)  all  losses  actually 
Losses.  sustained  within  the  year  and  not  compensated  by  insurance 
or  otherwise,  including  a  reasonable  allowance  for  depreciation  of  property, 
if  any,  and  in  the  case  of  insurance  companies  the  sums  other  than  dividends, 
paid  within  the  year  on  policy  and  annuity  contracts  and  the  net  addition, 
if  any,  required  by  law  to  be  made  within  the  year  to  reserve  funds;  (third) 
Interest  interest  actually  paid  within  the  year  on  its  bonded  or  other 

indebtedness  to  an  amount  of  such  bonded  and  other  indebt- 
edness not  exceeding  the  paid-up  capital  stock  of  such  corporation,  joint- 
stock  company  or  association,  or  insurance  company,  outstanding  at  the 
close  of  the  year,  and  in  the  case  of  a  bank,  banking  association  or  trust 
Taxes  company,  all  interest  actually  paid  by  it  within  the  year  on 

deposits;  (fourth)  all  sums  paid  by  it  within  the  year  for  taxes 
imposed  under  the  authority  of  the  United  States  or  of  any  State  or  Terri- 
tory thereof,  or  imposed  by  the  government  of  any  foreign  country  as  a 
Dividends  condition  to  carry  on  business  therein;  (fifth)  all  amounts 
Received,  received  by  it  within  the  year  as  dividends  upon  stock  of 
other  corporations,  joint-stock  companies  or  associations,  or  insurance  com- 
panies, subject  to  the  tax  hereby  imposed:  Provided,  That  in  the  case  of 
Foreign  a  corporation,  joint-stock  company  or  association,  or  insurance 
Corpora-  company,  organized  under  the  laws  of  a  foreign  country, 
tions.  such  net  income  shall  be  ascertained  by  deducting  from  the 

gross  amount  of  its  income  received  within  the  year  from  business  transacted 
and  capital  invested  within  the  United  States  and  any  of  its  Territories, 
Expenses  Alaska,  an(i  the  District  of  Columbia,  (first)  all  the  ordinary 

and  necessary  expenses  actually  paid  within  the  year  out  of 
earnings  in  the  maintenance  and  operation  of  its  business  and  property 
within  the  United  States  and  its  Territories,  Alaska,  and  the  District  of 
Columbia,  including  all  charges  such  as  rentals  or  franchise  payments  re- 
quired to  be  made  as  a  condition  to  the  continued  use  or  possession  of  prop- 
•r  erty;  (second)  all  losses  actually  sustained  within  the  year 

in  business  conducted  by  it  within  the  United  States  or  its 
Territories,  Alaska,  or  the  District  of  Columbia  not  compensated  by  insur- 
ance or  otherwise,  including  a  reasonable  allowance  for  depreciation  of 
property,  if  any,  and  in  the  case  of  insurance  companies  the  sums  other  than 
dividends,  paid  within  the  year  on  policy  and  annuity  contracts  and  the 
net  addition,  if  any,  required  by  law  to  be  made  within  the  year  to  reserve 
j  ,  .  funds;  (third)  interest  actually  paid  within  the  year  on  its 

bonded  or  other  indebtedness  to  an  amount  of  such  bonded 
and  other  indebtedness,  not  exceeding  the  proportion  of  its  paid-up  capital 
stock  outstanding  at  the  close  of  the  year  which  the  gross  amount  of  its  in- 


EXCISE   TAX   ON  CORPORATIONS    (1909)  307 

come  for  the  year  from  business  transacted  and  capital  invested  within  the 
United  States  and  any  of  its  Territories,  Alaska,  and  the  District  of  Columbia 
bears  to  the  gross  amount  of  its  income  derived  from  all  sources  within  and 
without  the  United  States;  (fourth)  the  sums  paid  by  it  within   « 
the  year  for  taxes  imposed  under  the  authority  of  the  United 
States  or  of  any  State  or  Territory  thereof;  (fifth)  all  amounts  received  by 
it  within  the  year  as  dividends  upon  stock  of  other  corporations,   Dividends 
joint-stock  companies  or  associations,  and  insurance  compa-   Received. 
nies,  subject  to  the  tax  hereby  imposed.    In  the  case  of  assessment  insurance 
companies    the  actual  deposit  of  sums  with  State  or  Territorial   office 
pursuant  to  law,  as  additions  to  guaranty  or  reserve  funds  £eserves 
shall  be  treated  as  being  payments  required  by  law  to  reserve 
funds. 

Third.  There  shall  be  deducted  from  the  amount  of  the  net  income  of  each 
of  such  corporations,  joint-stock  companies  or  associations,  or  insurance 
companies,  ascertained  as  provided  in  the  foregoing   para-   Exemp- 
praphs  of  this  section,  the  sum  of  five  thousand  dollars,  and  said   tion. 
tax  shall  be  computed  upon  the  remainder  of  said  net  income  of  such  cor- 
poration, joint-stock  company  or  association,  or  insurance  company,  for  the 
year  ending  December  thirty-first,  nineteen  hundred  and  nine,   Due  Date 
and  for  each  calendar  year  thereafter;  and  on  or  before  the  of  Returns. 
first  day  of  March,  nineteen  hundred  and  ten,  and  the  first  day  of  March 
in  each  year  thereafter,  a  true  and  accurate  return  under  oath  or  affirmation 
of  its  president,  vice-president,  or  other  principal  officer,  and  its  treasurer  or 
assistant  treasurer,  shall  be  made  by  each  of  the  corporations,   Q  ,. 
joint-stock  companies  or  associations,  and  insurance  compa- 
nies, subject  to  the  tax  imposed  by  this  section,  to  the  collector  of  internal 
revenue  for  the  district  in  which  such  corporation,  joint-stock  company 
or  association,  or  insurance  company  has  its  principal  place  of  business,  or, 
in  the  case  of  a  corporation,  joint-stock  company  or  association,  or  insurance 
company,  organized  under  the  laws  of  a  foreign  country,  in  the  place  where 
its  principal  business  is  carried  on  within  the  United  States,  in  such  form 
as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of  the  Secre- 
tary of  the  Treasury,  shall  prescribe,  setting  forth  (first)  the   Contents 
total  amount  of  the  paid-up  capital  stock  of  such  corporation,   of  Returns, 
joint-stock  company  or  association,  or  insurance  company,   Capital 
outstanding  at  the  close  of  the  year;  (second)  the  total  amount   Stock,  In- 
of  the  bonded  and  other  indebtedness  of  such  corporation,   debted- 
joint-stock    company  or  association,  or  insurance  company   ness,  Gross 
at  the  close  of  the  year;  (third)  the  gross  amount  of  the  income  l^01116* 
of  such  corporation,  joint-stock  company  or  association,  or  insurance  com- 
pany received  during  such  year  from  all  sources,  and  if  organized  un- 
der the  laws  of  a  foreign  country  the  gross  amount  of  its  income  received 
within  the   year  from  business   transacted  and  capital  invested  within 
the  United  States  and  any  of  its  Territories,  Alaska,  and  the  District  of 
Columbia;  also  the  amount  received  by  such  corporation,  joint-stock  com- 
pany or  association,  or  insurance  company  within  the  year  by  way  of  divi- 
dends upon  stock  of  other  corporations,  joint-stock  companies  or  associa- 


308  APPENDIX  D 

tions,  or  insurance  companies,  subject  to  the  tax  imposed  by  this  section; 
(fourth)  the  total  amount  of  all  the  ordinary  and  necessary  expenses  actu- 

Exoenses  a^y  pa^  °Ut  °*  eammSs  i*1  tne  maintenance  and  operation  of 
the  business  and  properties  of  such  corporation,  joint-stock 
company  or  association,  or  insurance  company  within  the  year,  stating  sep- 
arately all  charges  such  as  rentals  or  franchise  payments  required  to  be  made 
as  a  condition  to  the  continued  use  or  possession  of  property,  and  if  organ- 
ized under  the  laws  of  a  foreign  country  the  amount  so  paid  in  the  main- 
tenance and  operation  of  its  business  within  the  United  States  and  its  Terri- 
tories, Alaska,  and  the  District  of  Columbia;  (fifth)  the  total  amount  of 
j  all  losses  actually  sustained  during  the  year  and  not  compen- 

sated by  insurance  or  otherwise,  stating  separately  any 
amounts  allowed  for  depreciation  of  property,  and  in  the  cases  of  insurance 
companies  the  sums  other  than  dividends,  paid  within  the  year  on  policy 
Reserve  and  annuity  contracts  and  the  net  addition,  if  any,  required 
Funds.  by  law  to  be  made  within  the  year  to  reserve  fund;  and  in  the 

case  of  a  corporation,  joint-stock  company  or  association,  or  insurance  com- 
pany, organized  under  the  laws  of  a  foreign 'country,  all  losses  actually  sus- 
tained by  it  during  the  year  in  business  conducted  by  it  within  the  United 
States  or  its  Territories,  Alaska,  and  the  District  of  Columbia,  not  com- 
pensated by  insurance  or  otherwise,  stating  separately  any  amounts  allowed 
for  depreciation  of  property,  and  in  the  case  of  insurance  companies  the  sums 
other  than  dividends,  paid  within  the  year  on  policy  and  annuity  contracts 
and  the  net  addition,  if  any,  required  by  law  to  be  made  within  the  year  to 
reserve  fund;  (sixth)  the  amount  of  interest  actually  paid  within  the  year 
Interest  on  *ts  Bonded  or  °ther  indebtedness  to  an  amount  of  such 
bonded  and  other  indebtedness  not  exceeding  the  paid-up 
capital  stock  of  such  corporation,  joint-stock  company  or  association,  or 
insurance  company,  outstanding  at  the  close  of  the  year,  and  in  the  case  of 
a  bank,  banking  association,  or  trust  company,  stating  separately  all  interest 
paid  by  it  within  the  year  on  deposits;  or  in  case  of  a  corporation,  joint-stock 
company  or  association,  or  insurance  company,  organized  under  the  laws  of 
a  foreign  country,  interest  so  paid  on  its  bonded  or  other  indebtedness  to  an 
amount  of  such  bonded  and  other  indebtedness  not  exceeding  the  proportion 
of  its  paid-up  capital  stock  outstanding  at  the  close  of  the  year,  which  the 
gross  amount  of  its  income  for  the  year  from  business  transacted  and 
capital  invested  within  the  United  States  and  any  of  its  Territories,  Alaska, 
and  the  District  of  Columbia,  bears  to  the  gross  amount  of  its  income  de- 
rived from  all  sources  within  and  without  the  United  States;  (seventh)  the 
Taxes  amount  paid  by  it  within  the  year  for  taxes  imposed  under  the 

authority  of  the  United  States  or  any  State  or  Territory 
thereof,  and  separately  the  amount  so  paid  by  it  for  taxes  imposed  by  the 
government  of  any  foreign  country  as  a  condition  to  carrying  on  business 
therein;  (eighth)  the  net  income  of  such  corporation,  joint-stock  com- 
pany or  association,  or  insurance  company,  after  making  the  deductions  in 
this  section  authorized.  All  such  returns  shall  as  received  be  trans- 
mitted forthwith  by  the  collector  to  the  Commissioner  of  Internal  Rev- 
enue. 


EXCISE  TAX   ON  CORPORATIONS    (1909)  309 

Fourth.  Whenever  evidence  shall  be  produced  before  the  Commissioner 
of  Internal  Revenue  which  in  the  opinion  of  the  commissioner  justifies  the 
belief  that  the  return  made  by  any  corporation,  joint-stock  com-  Verifying 
pany   or  association,  or  insurance  company  is  incorrect,  or  Returns, 
whenever  any  collector  shall  report  to  the  Commissioner  of  Internal  Revenue 
that  any  corporation,  joint-stock  company  or  association,  or  insurance  com- 
pany has  failed  to  make  a  return  as  required  by  law,  the  Commissioner  of 
Internal  Revenue  may  acquire  from  the  corporation,  joint-stock  company 
or  association,  or  insurance  company  making  such  return,  such  further  in- 
formation with  reference  to  its  capital,  income,  losses,  and  expenditures 
as  he  may  deem  expedient;  and  the  Commissioner  of  Internal  Revenue,  for 
the  purpose  of  ascertaining  the  correctness  of  such  return  or  for  the  purpose 
of  making  a  return  when  none  has  been  made,  is  hereby  authorized,  by  any 
regularly   appointed  revenue  agent  specially  designated  by  Examina- 
him  for  that  purpose,  to  examine  any  books  and  papers  bear-  tion. 
ing  upon  the  matters  required  to  be  included  in  the  return  of  such  corpora- 
tion, joint-stock  company  or  association,  or  insurance  company,  and  to  re- 
quire the  attendance  of  any  officer  or  employee  of  such  corporation,  joint- 
stock  company  or  association,  or  insurance  company,  and  to  take  his  testi- 
mony with  reference  to  the  matter  required  by  law  to  be  included  in  such 
return,  with  power  to  administer  oaths  to  such  person  or  persons;  and  the 
Commissioner  of  Internal  Revenue  may  also  invoke  the  aid  of  any  court 
of  the  United  States  having  jurisdiction  to  require  the  attendance  of  such 
officers  or  employees  and  the  production  of  such  books  and  papers.    Upon 
the  information  so  acquired  the  Commissioner  of  Internal   Returns  by 
Revenue  may  amend  any  return  or  make  a  return  where  none   Depart- 
has  been  made.    All  proceedings  taken  by  the  Commissioner  ment. 
of  Internal  Revenue  under  the  provisions  of  this  section  shall  be  subject 
to  the  approval  of  the  Secretary  of  the  Treasury. 

Fifth.  All  returns  shall  be  retained  by  the  Commissioner  of  Internal 
Revenue,  who  shall  make  assessments  thereon;  and  in  case  of  any  return 
made  with  false  or  fraudulent  intent,  he  shall  add  one  hundred  Penalties, 
per  centum  of  such  tax,  and  in  case  of  a  refusal  or  neglect  to  False  In- 
make  a  return  or  to  verify  the  same  as  aforesaid  he  shall  add  tent, 
fifty  per  centum  of  such  tax.  In  case  of  neglect  occasioned  by  the  sickness 
or  absence  of  an  officer  of  such  corporation,  joint-stock  company  or  associa- 
tion, or  insurance  company,  required  to  make  said  return,  or  for  other  suf- 
ficient reason,  the  collector  may  allow  such  further  time  for  making  and 
delivering  such  return  as  he  may  deem  necessary,  not  exceeding  thirty  days. 
The  amount  so  added  to  the  tax  shall  be  collected  at  the  same  time  and  in 
the  same  manner  as  the  tax  originally  assessed,  unless  the  refusal,  neglect, 
or  falsity  is  discovered  after  the  date  for  payment  of  said  taxes,  in  which 
case  the  amount  so  added  shall  be  paid  by  the  delinquent  corporation,  joint- 
stock  company  or  association,  or  insurance  company,  immediately  upon 
notice  given  by  the  collector.  All  assessments  shall  be  made  and  the  several 
corporations,  joint-stock  companies  or  associations,  or  insurance  companies, 
shall  be  notified  of  the  amount  for  which  they  are  respectively  liable  on  or 
before  the  first  day  of  June  of  each  successive  year,  and  said  assessments 


310  APPENDIX  D 

shall  be  paid  on  or  before  the  thirtieth  day  of  June,  except  in  cases  of  refusal 
or  neglect  to  make  such  return,  and  in  cases  of  false  or  fraudulent  returns, 
in  which  cases  the  Commissioner  of  Internal  Revenue  shall,  upon  the  dis- 
Discovery  covery  thereof,  at  any  time  within  three  years  after  said  re- 
Limita-  turn  is  due,  make  a  return  upon  information  obtained  as  above 
tion.  provided  for,  and  the  assessment  made  by  the  Commissioner 

of  Internal  Revenue  thereon  shall  be  paid  by  such  corporation,  joint-stock 
company  or  association,  or  insurance  company  immediately  upon  notifica- 
Penalty  tion  of  the  amount  of  such  assessment;  and  to  any  sum  or 
Delayed  sums  due  and  unpaid  after  the  thirtieth  day  of  June  in  any 
Payment,  year,  and  for  ten  days  after  notice  and  demand  thereof  by 
the  collector,  there  shall  be  added  the  sum  of  five  per  centum  on  the  amount 
of  tax  unpaid  and  interest  at  the  rate  of  one  per  centum  per  month  upon  said 
tax  from  the  time  the  same  becomes  due. 

Sixth.  When  the  assessment  shall  be  made,  as  provided  in  this  section, 
the  returns,  together  with  any  corrections  thereof  which  may  have  been 
Public  made  by  the  commissioner,  shall  be  filed  in  the  office  of  the 

Record.  Commissioner  of  Internal  Revenue  and  shall  constitute  public 
records  and  be  open  to  inspection  as  such. 

Seventh.  It  shall  be  unlawful  for  any  collector,  deputy  collector,  agent, 
clerk,  or  other  officer  or  employee  of  the  United  States  to  divulge  or  make 
Divulging  known  in  any  manner  whatever  not  provided  by  law  to  any 
Contents  person  any  information  obtained  by  him  in  the  discharge  of 
of  Returns,  his  official  duty,  or  to  divulge  or  make  known  in  any  manner 
not  provided  by  law  any  document  received,  evidence  taken,  or  report  made 
under  this  section  except  upon  the  special  direction  of  the  President;  and  any 
offense  against  the  foregoing  provision  shall  be  a  misdemeanor  and  be  pun- 
p  |,  ished  by  a  fine  not  exceeding  one  thousand  dollars,  or  by  im- 

prisonment not  exceeding  one  year,  or  both,  at  the  discretion 
of  the  court. 

Eighth.  If  any  of  the  corporations,  joint-stock  companies  or  associations, 
or  insurance  companies  aforesaid,  shall  refuse  or  neglect  to  make  a 
Refusal  to  return  at  the  time  or  times  hereinbefore  specified  in  each  year, 
Make  Re-  or  shall  render  a  false  or  fraudulent  return,  such  corporation, 
turn  Pen-  joint-stock  company  or  association,  or  insurance  company  shall 
alty.  be  liable  to  a  penalty  of  not  less  than  one  thousand  dollars 

and  not  exceeding  ten  thousand  dollars. 

Any  person  authorized  by  law  to  make,  render,  sign,  or  verify  any  return 
who  makes  any  false  or  fraudulent  return,  or  statement,  with  intent  to 
False  Re-  defeat  or  evade  the  assessment  required  by  this  section  to 
turn  Pen-  be  made,  shall  be  guilty  of  a  misdemeanor,  and  shall  be 
alty.  fined  not  exceeding  one  thousand  dollars  or  be  imprisoned  not 

exceeding  one  year,  or  both,  at  the  discretion  of  the  court,  with  the  costs  of 
prosecution. 

All  laws  relating  to  the  collection,  remission,  and  refund  of  internal- 
revenue  taxes,  so  far  as  applicable  to  and  not  inconsistent  with  the  pro- 
Collections,  visions  of  this  section,  are  hereby  extended  and  made  applic- 
able to  the  tax  imposed  by  this  section. 


EXCISE   TAX   ON  CORPORATIONS    (1909)  311 

Jurisdiction  is  hereby  conferred  upon  the  circuit  and  district  courts  of 
the  United  States  for  the  district  within  which  any  person  Jurisdic- 
summoned  under  this  section  to  appear  to  testify  or  to  pro-  tionof 
duce  books  as  aforesaid,  shall  reside,  to  compel  such  attend-   Courts, 
ance,  production  of  books,  and  testimony  by  appropriate  process. 


APPENDIX  E 

EXTRACTS  FROM  FEDERAL  INCOME  TAX  l 
RELATING  TO  CORPORATIONS 

ENACTED  OCTOBER  3,  1913 
(REPEALED  BY  ACT  OF  SEPTEMBER  8,  1916) 

G.  (a)  That  the  normal  tax  hereinbefore  imposed  upon  individuals 
likewise  shall  be  levied,  assessed,  and  paid  annually  upon  the  entire  net 
Domestic  income  arising  or  accruing  from  all  sources  during  the  pre- 
Corpora-  ceding  calendar  year  to  every  corporation,  joint-stock  com- 
tions.  pany  or  association,  and  every  insurance  company,  organized 

in  the  United  States,  no  matter  how  created  or  organized,  not  including 
partnerships;  but  if  organized,  authorized,  or  existing  under  the  laws  of 
Foreign  any  foreign  country,  then  upon  the  amount  of  net  income 
Exempt.  accruing  from  business  transacted  and  capital  invested  within 
the  United  States  during  such  year:  Provided,  however,  That  nothing  in  this 
section  shall  apply  to  labor,  agricultural,  or  horticultural  organizations,  or 
to  mutual  savings  banks  not  having  a  capital  stock  represented  by  shares, 
or  to  fraternal  beneficiary  societies,  orders,  or  associations  operating  un- 
der the  lodge  system  or  for  the  exclusive  benefit  of  the  members  of  a 
fraternity  itself  operating  under  the  lodge  system,  and  providing  for  the 
payment  of  life,  sick,  accident,  and  other  benefits  to  the  members  of 
such  societies,  orders,  or  associations  and  dependents  of  such  members, 
nor  to  domestic  building  and  loan  associations,  nor  to  cemetery  companies, 
organized  and  operated  exclusively  for  the  mutual  benefit  of  their  members, 
nor  to  any  corporation  or  association  organized  and  operated  exclusively 
for  religious,  charitable,  scientific,  or  educational  purposes,  no  part  of  the 
net  income  of  which  inures  to  the  benefit  of  any  private  stockholder  or  in- 
dividual, nor  to  business  leagues,  nor  to  chambers  of  commerce  or  boards 
of  trade,  not  organized  for  profit  or  no  part  of  the  net  income  of  which  inures 
to  the  benefit  of  the  private  stockholder  or  individual;  nor  to  any  civic 
league  or  organization  not  organized  for  profit,  but  operated  exclusively 
for  the  promotion  of  social  welfare:  Provided  further,  That  there  shall  not 
be  taxed  under  this  section  any  income  derived  from  any  public  utility  or 
Public  from  the  exercise  of  any  essential  governmental  function 

Utility.  accruing  to  any  State,  Territory,  or  the  District  of  Columbia, 

1  Official  Title  of  the  law:  "Tariff  Act  of  Oct.  3,  1913."  For  reference  to 
this  law  in  the  ascertainment  of  net  income  of  corporations  for  the  prewar 
period  (year  1913)  see  page  122. 


EXTRACTS  FROM  INCOME  TAX  OF    1913  313 

or  any  political  subdivision  of  a  State,  Territory,  or  the  District  of  Columbia, 
nor  any  income  accruing  to  the  government  of  the  Philippine  Islands  or 
Porto  Rico,  or  of  any  political  subdivision  of  the  Philippine  Islands  or  Porto 
Rico:  Provided,  That  whenever  any  State,  Territory,  or  the  District  of 
Columbia,  or  any  political  subdivision  of  a  State  or  Territory,  has,  prior 
to  the  passage  of  this  Act,  entered  in  good  faith  into  a  contract  with  any 
person  or  corporation,  the  object  and  purpose  of  which  is  to  acquire,  con- 
struct, operate  or  maintain  a  public  utility,  no  tax  shall  be  levied  under 
the  provisions  of  this  Act  upon  the  income  derived  from  the  operation  of 
such  public  utility,  so  far  as  the  payment  thereof  will  impose  a  loss  or  bur- 
den upon  such  State,  Territory,  or  the  District  of  Columbia,  or  a  political 
subdivision  of  a  State  or  Territory;  but  this  provision  is  not  intended  to 
confer  upon  such  person  or  corporation  any  financial  gain  or  exemption  or 
to  relieve  such  person  or  corporation  from  the  payment  of  a  tax  as  provided 
for  in  this  section  upon  the  part  or  portion  of  the  said  income  to  which 
such  person  or  corporation  shall  be  entitled  under  such  contract. 

(b)  Such  net  income  shall  be  ascertained  by  deducting  from  the  gross 
amount  of  the  income  of  such  corporation,  joint-stock  company  or  associ- 
ation, or  insurance  company,  received  within  the  year  from   "Net In- 
all  sources,  (first)  all  the  ordinary  and  necessary  expenses  paid   come  " 
within  the  year  in  the  maintenance  and  operation  of  its  busi-  Defined. 
ness  and  properties,  including  rentals  or  other  payments  required  to  be 
made  as  a  condition  to  the  continued  use  or  possession  of  prop-   Expenses, 
erty;   (second)   all  losses  actually  sustained  within  the  year  Losses. 
and  not  compensated  by  insurance  or  otherwise,  including  a  reasonable 
allowance  for  depreciation  by  use,  wear  and  tear  of  property,  if  any;  and  in 
the  case  of  mines  a  reasonable  allowance  for  depletion  of  ores  Deoletion 
and  all  other  natural  deposits,  not  to  exceed  5  per  centum  of 
the  gross  value  at  the  mine  of  the  output  for  the  year  for  which  the  com- 
putation is  made;  and  in  case  of  insurance  companies  the  net  addition,  if 
any,  required  by  law  to  be  made  within  the  year  to  reserve  p 
funds  and  the  sums  other  than  dividends  paid  within  the 
year  on  policy  and  annuity  contracts:  Provided,  That  mutual  fire  insurance 
companies   requiring  their  members  to  make  premium  de-  Insurance 
posits  to  provide  for  losses  and  expenses  shall  not  return  as   Companies. 
income  any  portion  of  the  premium  deposits  returned  to  their  policyholders, 
but  shall  return  as  taxable  income  all  income  received  by  them  from  all 
other  sources  plus  such  portions  of  the  premium  deposits  as  are  retained 
by  the  companies  for  purposes  other  than  the  payment  of  losses  and  expenses 
and  reinsurance  reserves:  Provided  further,  That  mutual  marine  insurance 
companies  shall  include  in  their  return  of  gross  income  gross  premiums  col- 
lected and  received  by  them  less  amounts  paid  for  reinsurance,  but  shall 
be  entitled  to  include  in  deductions  from  gross  income  amounts  repaid  to 
policyholders  on  account  of  premiums  previously  paid  by  them  and  interest 
paid  upon  such  amounts  between  the  ascertainment  thereof  and  the  pay- 
ment thereof  and  life  insurance  companies  shall  not  include  as  income  in 
any  year  such  portion  of  any  actual  premium  received  from  any  individual 
policyholder  as  shall  have  been  paid  back  or  credited  to  such  individual 


314  APPENDIX  E 

policyholder,  or  treated  as  an  abatement  of  premium  of  such  individual 
policyholder,  within  such  year;  (third)  the  amount  of  interest  accrued  and 
-  .  .  paid  within  the  year  on  its  indebtedness  to  an  amount  of 
such  indebtedness  not  exceeding  one-half  of  the  sum  of  its 
interest  bearing  indebtedness  and  its  paid-up  capital  stock  outstanding  at 
the  close  of  the  year,  or  if  no  capital  stock,  the  amount  of  interest  paid  within 
the  year  on  an  amount  of  its  indebtedness  not  exceeding  the  amount  of 
capital  employed  in  the  business  at  the  close  of  the  year:  Provided,  That  in 
case  of  indebtedness  wholly  secured  by  collateral  the  subject  of  sale  in  or- 
dinary business  of  such  corporation,  joint-stock  company,  or  association, 
the  total  interest  secured  and  paid  by  such  company,  corporation,  or  asso- 
ciation, within  the  year  on  any  such  indebtedness  may  be  deducted  as  a 
part  of  its  expense  of  doing  business:  Provided  further,  That  in  the  case  of 
bonds  or  other  indebtedness,  which  have  been  issued  with  a  guaranty  that 
the  interest  payable  thereon  shall  be  free  from  taxation,  no  deduction  for 
the  payment  of  the  tax  herein  imposed  shall  be  allowed;  and  in  the  case  of 
a  bank,  banking  association,  loan,  or  trust  company,  interest  paid  within 
the  year  on  deposits  or  on  moneys  received  for  investment  and  secured  by 
interest-bearing  certificates  of  indebtedness  issued  by  such  bank,  banking 
,«  association,  loan  or  trust  company;  (fourth)  all  sums  paid  by 

it  within  the  year  for  taxes  imposed  under  the  authority  of 
the  United  States  or  of  any  State  or  Territory  thereof,  or  imposed  by  the 
Foreign  Government  of  any  foreign  country:  Provided,  That  in  the 
Corpora-  case  of  a  corporation,  joint-stock  company  or  association,  or 
tions.  insurance  company,  organized,  authorized,  or  existing  under 

the  laws  of  any  foreign  country,  such  net  income  shall  be  ascertained  by 
deducting  from  the  gross  amount  of  its  income  accrued  within  the  year 
from  business  transacted  and  capital  invested  within  the  United  States, 
p,  (first)  all  the  ordinary  and  necessary  expenses  actually  paid 

within  the  year  out  of  earnings  in  the  maintenance  and  opera- 
tion of  its  business  and  property  within  the  United  States,  including  rentals 
or  other  payments  required  to  be  made  as  a  condition  to  the  continued  use 
Losses  °r  P°ssessi°n  °f  property;  (second)  all  losses  actually  sus- 

tained within  the  year  in  business  conducted  by  it  within  the 
United  States  and  not  compensated  by  insurance  or  otherwise,  including  a 
reasonable  allowance  for  depreciation  by  use,  wear  and  tear  of  property,  if 
any,  and  in  the  case  of  mines  a  reasonable  allowance  for  depletion  of  ores 
Pj  «  ..  and  all  other  natural  deposits,  not  to  exceed  5  per  centum  of 
the  gross  value  at  the  mine  of  the  output  for  the  year  for 
which  the  computation  is  made;  and  in  case  of  insurance  companies  the  net 
addition,  if  any,  required  by  law  to  be  made  within  the  year  to  reserve 
funds  and  the  sums  other  than  dividends  paid  within  the  year  on  policy 
Insurance  and  annuity  contracts:  Provided  further,  That  mutual  fire 
Companies,  insurance  companies  requiring  their  members  to  make  pre- 
mium deposits  to  provide  for  losses  and  expenses  shall  not  return  as  income 
any  portion  of  the  premium  deposits  returned  to  their  policyholders,  but 
shall  return  as  taxable  income  all  income  received  by  them  from  all  other 
sources  plus  such  portions  of  the  premium  deposits  as  are  retained  by  the 


EXTRACTS   FROM  INCOME   TAX  OF    1913  315 

companies  for  purposes  other  than  the  payment  of  losses  and  expenses  and 
reinsurance  reserves:  Provided  further,  That  mutual  marine  insurance  com- 
panies shall  include  in  their  return  of  gross  income  gross  premiums  collected 
and  received  by  them  less  amounts  paid  for  reinsurance,  but  shall  be  entitled 
to  include  in  deductions  from  gross  income  amounts  repaid  to  policy-holders 
on  account  of  premiums  previously  paid  by  them,  and  interest  paid  upon 
such  amounts  between  the  ascertainment  thereof  and  the  payment  thereof 
and  life  insurance  companies  shall  not  include  as  income  in  any  year  such 
portion  of  any  actual  premium  received  from  any  individual  policy-holder 
as  shall  have  been  paid  back  or  credited  to  such  individual  policy- 
holder,  or  treated  as  an  abatement  of  premium  of  such  individual  policy- 
holder,  within  such  year;  (third)  the  amount  of  interest  jjj^eres^ 
accrued  and  paid  within  the  year  on  its  indebtedness  to  an 
amount  of  such  indebtedness  not  exceeding  the  proportion  of  one-half  of 
the  sum  of  its  interest  bearing  indebtedness  and  its  paid-up  capital  stock 
outstanding  at  the  close  of  the  year,  or  if  no  capital  stock,  the  capital  em- 
ployed in  the  business  at  the  close  of  the  year  which  the  gross  amount  of 
its  income  for  the  year  from  business  transacted  and  capital  invested  within 
the  United  States  bears  to  the  gross  amount  of  its  income  derived  from 
all  sources  within  and  without  the  United  States:  Provided,  That  in  the 
case  of  bonds  or  other  indebtedness  which  have  been  issued  with  a  guaranty 
that  the  interest  payable  thereon  shall  be  free  from  taxation,  no  deduction 
for  the  payment  of  the  tax  herein  imposed  shall  be  allowed;  faxes 
(fourth)  all  sums  paid  by  it  within  the  year  for  taxes  imposed 
under  the  authority  of  the  United  States  or  of  any  State  or  Territory  thereof 
or  the  District  of  Columbia.  In  the  case  of  assessment  insurance  com- 
panies, whether  domestic  or  foreign,  the  actual  deposit  of  sums  with  State 
or  Territorial  officers,  pursuant  to  law,  as  additions  to  guarantee  or  re- 
serve funds  shall  be  treated  as  being  payments  required  by  law  to  reserve 
funds. 

(c)  The  tax  herein  imposed  shall  be  computed  upon  its  entire  net  income 
accrued  within  each  preceding  calendar  year  ending  December  thirty-first: 
Provided,  however,  That  for  the  year  encUng  December  thirty-  Ten 
first,  nineteen  hundred  and  thirteen,  said  tax  shall  be  imposed   Months 
upon  its  entire  net  income  accrued  within  that  portion  of  of  1913. 
said  year  from  March  first  to  December  thirty-first,  both  dates  inclu- 
sive, to  be  ascertained  by  taking  five-sixths  of  its  entire  net  income  for 
said  calender  year:  Provided  further,  That  any  corporation,  joint-stock 
association,  or  insurance  company  subject  to  this  tax  may  Desig- 
designate  the  last  day  of  any  month  in  the  year  as  the  day  of  nated  Fis- 
the  closing  of  its  fiscal  year  and  shall  be  entitled  to  have  calYear. 
the  tax  payable  by   it  computed   upon   the   basis   of   the   net   income 
ascertained  as  herein  provided  for  the  year  ending  on  the  day  so  designated 
in  the  year  preceding  the  date  of  assessment  instead  of  upon  the  basis  of 
the  net  income  for  the  calendar  year  preceding  the  date  of  assessment; 
and  it  shall  give  notice  of  the  day  it  has  thus  designated  as  the  closing  of  its 
fiscal  year  to  the  collector  of  the  district  in  which  its  principal  business  office 
is  located  at  any  time  not  less  than  thirty  days  prior  to  the  date  upon  which 


316  APPENDIX  E 

its  annual  return  shall  be  filed.  All  corporations,  joint-stock  companies 
or  associations,  and  insurance  companies  subject  to  the  tax  herein  imposed, 
Due  Date  computing  taxes  upon  the  income  of  the  calendar  year,  shall, 
of  Return,  on  or  before  the  first  day  of  March,  nineteen  hundred  and 
fourteen,  and  the  first  day  of  March  in  each  year  thereafter,  and  all  cor- 
porations, joint-stock  companies  or  associations,  and  insurance  companies, 
computing  taxes  upon  the  income  of  a  fiscal  year  which  it  may  designate 
in  the  manner  hereinbefore  provided,  shall  render  a  like  return  within  sixty 
days  after  the  close  of  its  said  fiscal  year,  and  within  sixty  days  after  the 
close  of  its  fiscal  year  in  each  year  thereafter,  or  in  the  case  of  a  corporation, 
joint-stock  company  or  association,  or  insurance  company,  organized  or 
Returns.  existing  under  the  laws  of  a  foreign  country,  in  the  place  where 
Oath.  its  principal  business  is  located  within  the  United  States,  in 

such  form  as  the  Commissioner  of  Internal  Revenue,  with  the  approval  of 
the  Secretary  of  the  Treasury,  shall  prescribe,  shall  render  a  true  and  accur- 
ate return  under  oath  or  affirmation  of  its  president,  vice  president,  or  other 
Capital  principal  officer,  and  its  treasurer  or  assistant  treasurer,  to  the 

Stock.  collector  of  internal  revenue  for  the  district  in  which  it  has 

its  principal  place  of  business,  setting  forth  (first)  the  total  amount  of  its 
paid-up  capital  stock  outstanding,  or  if  no  capital  stock  is  capital  employed 
in  business,  at  the  close  of  the  year;  (second)  the  total  amount  of  its  bonded 
and  other  indebtedness  at  the  close  of  the  year;  (third)  the  gross  amount 
Indebted-  of  its  income,  received  during  such  year  from  all  sources,  and 
ness.  if  organized  under  the  laws  of  a  foreign  country  the  gross 

amount  of  its  income  received  within  the  year  from  business  transacted  and 
Expenses  caPita*  invested  within  the  United  States;  (fourth)  the  total 

amount  of  all  its  ordinary  and  necessary  expenses  paid  out 
of  earnings  in  the  maintenance  and  operation  of  the  business  and  properties 
of  such  corporation,  joint-stock  company  or  association,  or  insurance  com- 
pany within  the  year,  stating  separately  all  rentals  or  other  payments  re- 
quired to  be  made  as  a  condition  to  the  continued  use  or  possession  of  prop- 
erty, and  if  organized  under  the  laws  of  a  foreign  country  the  amount  so 
paid  in  the  maintenance  and  operation  of  its  business  within  the  United 
States;  (fifth)  the  total  amount  of  all  losses  actually  sustained  during  the 
y  year  and  not  compensated  by  insurance  or  otherwise,  stating 

separately  any  amounts  allowed  for  depreciation  of  property, 
and  in  case  of  insurance  companies  the  net  addition,  if  any,  required  by  law 
to  be  made  within  the  year  to  reserve  funds  and  the  sums  other  than  divi- 
dends paid  within  the  year  on  policy  and  annuity  contracts:  Provided 
further,  That  mutual  fire  insurance  companies  requiring  their  members 
Insurance  to  make  premium  deposits  to  provide  for  losses  and  expenses 
Com-  shall  not  return  as  income  any  portion  of  the  premium  de- 

panies.  posits  returned  to  their  policyholders,  but  shall  return  as 

taxable  income  all  income  received  by  them  from  all  other  sources  plus 
such  portions  of  the  premium  deposits  as  are  retained  by  the  companies 
for  purposes  other  than  the  payment  of  losses  and  expenses  and  reinsurance 
reserves:  Provided  further,  That  mutual  marine  insurance  companies  shall 
include  in  their  return  of  gross  income  gross  premiums  collected  and  received 


EXTRACTS   FROM   INCOME   TAX   OF    1913  317 

by  them  less  amounts  paid  for  reinsurance,  but  shall  be  entitled  to  include 
in  deductions  from  gross  income  amounts  repaid  to  policyholders  on  account 
of  premiums  previously  paid  by  them,  and  interest  paid  upon  such  amounts 
between  the  ascertainment  thereof  and  the  payment  thereof  and  life  insur- 
ance companies  shall  not  include  as  income  in  any  year  such  portion  of  any 
actual  premium  received  from  any  individual  policyholder  as  shall  have 
been  paid  back  or  credited  to  such  individual  policyholder,  or  treated  as  an 
abatement  of  premium  of  such  individual  policyholder,  within  such  year; 
and  in  case  of  a  corporation,  joint-stock  company  or  association,  or  insurance 
company,  organized  under  the  laws  of  a  foreign  country,  all  losses  actually 
sustained  by  it  during  the  year  in  business  conducted  by  it  within  the  United 
States,  not  compensated  by  insurance  or  otherwise,  stating  separately  any 
amounts  allowed  for  depreciation  of  property,  and  in  case  of  insurance  com- 
panies the  net  addition,  if  any,  required  by  law  to  be  made  within  the  year 
to  reserve  funds  and  the  sums  other  than  dividends  paid  within  the  year  on 
policy  and  annuity  contracts:  Provided  further,  That  mutual  fire  insurance 
companies  requiring  their  members  to  make  premium  deposits  to  provide 
for  losses  and  expenses  shall  not  return  as  income  any  portion  of  the  premium 
deposits  returned  to  their  policyholders,  but  shall  return  as  taxable  income 
all  income  received  by  them  from  all  other  sources  plus  such  portions  of  the 
premium  deposits  as  are  retained  by  the  companies  for  purposes  other  than 
the  payment  of  losses  and  expenses  and  reinsurance  reserves:  Provided  further , 
That  mutual  marine  insurance  companies  shall  include  in  their  return  of 
gross  income  gross  premiums  collected  and  received  by  them  less  amounts 
paid  for  reinsurance,  but  shall  be  entitled  to  include  in  deductions  from  gross 
income  amounts  repaid  to  policyholders  on  account  of  premiums  previously 
paid  by  them  and  interest  paid  upon  such  amounts  between  the  ascertain- 
ment thereof  and  the  payment  thereof  and  life  insurance  companies  shall 
not  include  as  income  in  any  year  such  portion  of  any  actual  premium  re- 
ceived from  any  individual  policyholder  as  shall  have  been  paid  back  or 
credited  to  such  individual  policyholder,  or  treated  as  an  abatement  of 
premium  of  such  individual  policyholder,  within  such  year;  jjj^erest 
(sixth)  the  amount  of  interest  accrued  and  paid  within  the 
year  on  its  bonded  or  other  indebtedness  not  exceeding  one-half  of  the  sum 
of  its  interest  bearing  indebtedness  and  its  paid-up  capital  stock,  outstand- 
ing at  the  close  of  the  year,  or  if  no  capital  stock,  the  amount  of  interest 
paid  within  the  year  on  an  amount  of  indebtedness  not  exceeding  the  amount 
of  capital  employed  in  the  business  at  the  close  of  the  year,  and  in  the  case 
of  a  bank,  banking  association,  or  trust  company,  stating  separately  all 
interest  paid  by  it  within  the  year  on  deposits;  or  in  case  of  a  corporation, 
joint-stock  company  or  association,  or  insurance  company,  organized  under 
the  laws  of  a  foreign  country,  interest  so  paid  on  its  bonded  or  other  indebt- 
edness to  an  amount  of  such  bonded  or  other  indebtedness  not  exceeding 
the  proportion  of  its  paid-up  capital  stock  outstanding  at  the  close  of  the 
year,  or  if  no  capital  stock,  the  amount  of  capital  employed  in  the  business 
at  the  close  of  the  year,  which  the  gross  amount  of  its  income  for  the  year 
from  business  transacted  and  capital  invested  within  the  United  States 
bears  to  the  gross  amount  of  its  income  derived  from  all  sources  within  and 


318  APPENDIX  E 

without  the  United  States;  (seventh)  the  amount  paid  by  it  within  the  year 
Taxes.  *0r  taxes  imposed  under  the  authority  of  the  United  States 

and  separately  the  amount  so  paid  by  it  for  taxes  imposed 
by  the  Government  of  any  foreign  country;  (eighth)  the  net  income  of  such 
corporation,  joint-stock  company  or  association,  or  insurance  company, 
after  making  the  deductions  in  this  subsection  authorized.  All  such  returns 
shall  as  received  be  transmitted  forthwith  by  the  collector  to  the  Commis- 
sioner of  Internal  Revenue. 

All  assessments  shall  be  made,  and  the  several  corporations,  joint-stock 
companies  or  associations,  and  insurance  companies  shall  be  notified  of  the 
Due  Date  amount  for  which  they  are  respectively  liable  on  or  before 
Payment.  the  first  day  of  June  of  each  successive  year,  and  said  assess- 
ment shall  be  paid  on  or  before  the  thirtieth  day  of  June:  Provided,  That 
every  corporation,  joint-stock  company  or  association,  and  insurance  com- 
pany, computing  taxes  upon  the  income  of  the  fiscal  year  which  it  may 
designate  in  the  manner  hereinbefore  provided,  shall  pay  the  taxes  due 
under  its  assessment  within  one  hundred  and  twenty  days  after  the  date 
upon  which  it  is  required  to  file  its  list  or  return  of  income  for  assessment; 
Refusal,  except  in  cases  of  refusal  or  neglect  to  make  such  return,  and 
Neglect.  in  cases  of  false  or  fraudulent  returns,  in  which  cases  the  Com- 
missioner of  Internal  Revenue  shall,  upon  the  discovery  thereof,  at  any 
time  within  three  years  after  said  return  is  due,  make  a  return  upon  in- 
formation obtained  as  provided  for  in  this  section  or  by  existing  law,  and 
the  assessment  made  by  the  Commissioner  of  Internal  Revenue  thereon 
shall  be  paid  by  such  corporation,  joint-stock  company  or  association,  or 
insurance  company  immediately  upon  notification  of  the  amount  of  such 
assessment;  and  to  any  sum  or  sums  due  and  unpaid  after  the  thirtieth  day 
of  June  in  any  year,  or  after  one  hundred  and  twenty  days  from  the  date 
on  which  the  return  of  income  is  required  to  be  made  by  the  taxpayer,  and 
after  ten  days'  notice  and  demand  thereof  by  the  collector,  there  shall  be 
added  the  sum  of  5  per  centum  on  the  amount  of  tax  unpaid  and  interest 
at  the  rate  of  i  per  centum  per  month  upon  said  tax  from  the  tune  the  same 
becomes  due. 

(d)  When  the  assessment  shall  be  made,  as  provided  in  this  section, 
the  returns,  together  with  any  corrections  thereof  which  may  have  been 
Assess-  made  by  the  commissioner,  shall  be  filed  in  the  office  of  the 
ments.  Commissioner  of  Internal  Revenue  and  shall  constitute 

public  records  and  be  open  to  inspection  as  such:  Provided,  That  any  and 
all  such  returns  shall  be  open  to  inspection  only  upon  the  order  of  the  Presi- 
dent, under  rules  and  regulations  to  be  prescribed  by  the  Secretary  of  the 
Treasury  and  approved  by  the  President:  Provided  further,  That  the  proper 
officers  of  any  State  imposing  a  general  income  tax  may,  upon  the  request 
of  the  governor  thereof,  have  access  to  said  returns  or  to  an  abstract  thereof, 
showing  the  name  and  income  of  each  such  corporation,  joint-stock  com- 
pany, association  or  insurance  company,  at  such  times  and  in  such  manner 
as  the  Secretary  of  the  Treasury  may  prescribe. 

If  any  of  the  corporations,  joint-stock  companies  or  associations,  or 
insurance  companies  aforesaid,  shall  refuse  or  neglect  to  make  a  return  at 


EXTRACTS   FROM  INCOME   TAX   OF    1913  319 

the  time  or  times  hereinbefore  specified  in  each  year,  or  shall  Penalty, 
render  a  false  or  fraudulent  return,  such  corporation,  joint-  Fraud. 
stock  company  or  association,  or  insurance  company  shall  be  liable  to  a 
penalty  of  not  exceeding  $10,000. 

H.  That  the  word  "State"  or  "United  States"  when  used  in  this  sec- 
tion shall  be  construed  to  include  any  Territory,  Alaska,  the   "  United 
District  of  Columbia,  Porto  Rico,  and  the  Philippine  Islands,   States." 
when  such  construction  is  necessary  to  carry  out  its  provisions. 


APPENDIX  F 

TABLE  OF  ADDITIONAL  TAXES  (SURTAXES)  IMPOSED  UPON 
INDIVIDUALS  BY  INCOME  TAX 

ACT  OF  OCTOBER  3,  1913  ("TARIFF  ACT")  l 
(REPEALED  BY  ACT  OF  SEPTEMBER  8,  1916) 

Upon  the  amount  by  which  the  total  net  income  exceeds: 

Per  Annum 

$20,000  and  does  not  exceed  $50,000 i  per  cent. 

50,000    "       "      "        "        75,000 2    "     " 

75,000    '  100,000 3    "     " 

100,000    "        "      "        "       250,000 4    "     " 

250,000    "       "      "        "      500,000 ' 5    "     " 

and  in  excess  of  $500,000 6    "     " 

1For  present  application  of  surtaxes  under  this  law,  see  "Dividends," 
page  23. 


APPENDIX  G 

NEW  YORK  STATE  INCOME  TAX  ON  MANUFACTURING  AND 
MERCANTILE  CORPORATIONS 

ENACTED  JUNE  4,  1917 
AN  ACT 

TO  AMEND  THE  TAX  LAW,  IN  RELATION  TO  A  FRANCHISE  TAX 
ON  MANUFACTURING  AND  MERCANTILE  CORPORATIONS, 
AND    MAKING    APPROPRIATIONS    FOR    ADMINISTRATION 
EXPENSES. 
The  People  of  the  State  of  New  York,  represented  in  Senate  and  Assembly, 

do  enact  as  follows: 

Section  i.  Chapter  sixty- two  of  the  laws  of  nineteen  hundred  and  nine, 

entitled  "An  act  in  relation  to  taxation,  constituting  chapter  sixty  of  the 

consolidated  laws,"  is  hereby  amended  by  inserting  therein  a  new  article, 

to  be  article  nine-a,  to  read  as  follows: 

ARTICLE  9-A 
FRANCHISE  TAX  ON  MANUFACTURING  AND  MERCANTILE  CORPORATIONS 

Sec.  208.  Definitions. 

209.  Franchise  tax  on  corporations  based  on  net  income. 

210.  Corporations  exempt  from  article. 

211.  Reports  of  corporations  to  tax  commission. 

212.  Reports  by  corporation  on  basis  of  fiscal  year. 

213.  Reports  to  be  sworn  to;  forms. 

214.  Computation  of  tax. 

215.  Rate  of  tax. 

216.  Penalty  for  failure  to  report. 

217.  Powers  of  tax  commission. 

218.  Revision  and  readjustment  of  accounts  by  tax  commission. 

219.  Review  or  determination  of  tax  commission  by  certiorari. 
2i9a.  Audit  and  statement  of  tax. 

2i9b.  Notice  of  tax. 

2i9C.  When  tax  payable. 

2i9d.  Corrections  and  changes. 

2196.  Warrant  for  the  collection  of  taxes. 

2i9f.  Action  for  recovery  of  taxes;  forfeiture  of  charter  by  delinquent 

corporations. 

2i9g.  Deposit  of  revenues  collected. 
2  igh.  Disposition  of  revenues  collected. 


322  APPENDIX   G 

Sec.  2iQL   Secrecy  required  of  officials;  penalty  for  violation. 

2igj.   Manufacturing  and  mercantile  corporations  exempt  from  per- 
sonal property  tax  and  from  the  provisions  of  sections  twelve, 
twenty-seven,  one  hundred  and  eighty-two  and  one  hundred 
and  ninety-two  of  the  tax  law. 
2igk.  Limitation  of  time. 

§  208.  DEFINITIONS.  As  used  in  this  article,  i.  The  term  "corporation" 
includes  a  joint-stock  company  or  association; 

2.  The  words  "tangible  personal  property"  shall  be  taken  to  mean  cor- 
poreal personal  property,  such  as  machinery,  tools,  implements,  goods,  wares 
and  merchandise,  and  shall  not  be  taken  to  mean  money,  deposits  hi  bank, 
shares  of  stock,  bonds,  notes,  credits  or  evidences  of  an  interest  in  property 
and  evidences  of  debt; 

3.  The  term  "manufacturing  corporation"  means  a  corporation  princi- 
pally engaged  in  the  business  of  manufacturing  tangible  personal  property 
for  itself  or  for  others; 

4.  The  term  "mercantile  corporation"  means  a  corporation  principally 
engaged  in  the  business  of  buying  or  selling  tangible  personal  property  for 
itself  or  for  others. 

§  209.  FRANCHISE  TAX  ON  CORPORATIONS  BASED  ON  NET  INCOME.  For 
the  privilege  of  exercising  its  franchises  in  this  state  in  a  corporate  or  organ- 
ized capacity  every  domestic  manufacturing  and  every  domestic  mercantile 
corporation,  and  for  the  privilege  of  doing  business  in  this  state,  every 
foreign  manufacturing  and  every  foreign  mercantile  corporation,  except 
corporations  specified  in  the  next  section,  shall  annually  pay  in  advance  for 
the  year  beginning  November  first  next  preceding  an  annual  franchise  tax, 
to  be  computed  by  the  tax  commission  upon  the  basis  of  its  net  income  for 
its  fiscal  or  the  calendar  year  next  preceding,  as  hereinafter  provided,  upon 
which  income  such  corporation  is  required  to  pay  a  tax  to  the  United  States. 

§  210.  CORPORATIONS  EXEMPT  FROM  ARTICLE.  Corporations  liable  to  a 
tax  under  section  one  hundred  and  eighty-four  of  this  chapter,  corporations 
owning  or  operating  elevated  railroads  or  surface  railroads  not  operated  by 
steam,  or  formed  for  supplying  water  or  gas  or  for  electric  or  steam  heating, 
lighting  or  power  purposes  and  liable  to  a  tax  under  sections  one  hundred 
and  eighty-five  and  one  hundred  and  eighty-six  of  this  chapter,  shall  be 
exempt  from  the  payment  of  the  taxes  prescribed  by  this  article. 

§  211.  REPORTS  OF  CORPORATIONS  TO  TAX  COMMISSION.  Every  corpora- 
tion taxable  under  this  article  as  well  as  foreign  corporations  having  officers, 
agents  or  representatives  within  the  state  shall  annually  on  or  before  July  first 
transmit  to  the  tax  commission  a  report  in  the  form  prescribed  by  the  tax 
commission  specifying:  i.  The  name  and  location  of  the  principal  place  of 
business  of  such  corporation,  the  state  under  the  laws  of  which  organized, 
and  the  date  thereof;  the  kind  of  business  transacted. 

2.  The  amount  of  its  net  income  for  its  preceding  fiscal  or  the  preceding 
calendar  year  as  shown  in  the  last  return  of  annual  net  income  made  by  it 
to  the  United  States  treasury  department. 

3.  The  average  monthly  value  for  the  fiscal  or  calendar  year  of  its  real 
property  and  tangible  personal  property  in  each  city,  village  or  portion  of  a 


NEW  YORK  STATE   INCOME   TAX  323 

town  outside  of  a  village  within  the  state,  and  the  average  monthly  value 
of  all  its  real  property  and  tangible  personal  property  wherever  located. 

4.  The  average  monthly  value  for  the  fiscal  or  calendar  year  of  bills  and 
accounts  receivable  for  (a)  tangible  personal  property  sold  from  its  stores 
or  stocks  within  the  state,  (b)  tangible  personal  property  manufactured  or 
shipped  from  within  the  state  and  (c)  services  performed  within  the  state, 
and  the  average  monthly  total  value  for  the  fiscal  or  calendar  year  of  bills 
and  accounts  receivable  for  (a)  tangible  personal  property  sold  from  its 
stores  or  stocks  within  and  without  the  state,  (b)  tangible  personal  property 
manufactured  or  shipped  from  within  the  state  and  other  states  and  coun- 
tries, and  (c)  services  performed  both  within  and  without  the  state. 

5.  The  average  total  value  for  the  fiscal  or  calendar  year  of  the  stock  of 
other  corporations  owned  by  the  corporation,  and  the  proportion  of  the 
average  value  of  the  stock  of  such  other  corporations  within  the  state  of 
New  York,  as  allocated  pursuant  to  section  two  hundred  and  fourteen  of 
this  chapter. 

6.  If  the  corporation  has  no  real  or  tangible  personal  property  within  the 
state,  the  city,  village  or  portion  of  a  town  outside  of  a  village  in  the  state 
in  which  is  located  the  office  in  which  its  principal  financial  concerns  within 
the  state  are  transacted. 

7.  Such  other  facts  as  the  tax  commission  may  require  for  the  purpose  of 
making  the  computation  required  by  this  article. 

8.  Any  corporation  taxable  hereunder  may  omit  from  its  report  the 
statements  required  by  subdivisions  three  to  seven,  both  inclusive,  by  in- 
corporating in  its  report  a  consent  to  be  taxed  upon  its  entire  net  income. 

§  212.  REPORTS  BY  CORPORATION  ON  BASIS  OF  FISCAL  YEAR.  A  cor- 
poration which  reports  to  the  United  States  treasury  department  on  the 
basis  of  its  fiscal  year,  may  report  to  the  tax  commission  upon  the  same 
basis. 

§  213.  REPORTS  TO  BE  SWORN  TO;  FORMS.  Every  report  required  by  this 
article  shall  have  annexed  thereto  the  affidavit  of  the  president,  vice-presi- 
dent, secretary  or  treasurer  of  the  corporation  to  the  effect  that  the  state- 
ments contained  therein  are  true.  Blank  forms  of  report  shall  be  furnished 
by  the  tax  commission,  on  application,  but  failure  to  secure  such  a  blank 
shall  not  release  any  corporation  from  the  obligation  of  making  a  report 
herein  required.  The  commission  may  require  a  further  or  supplemental 
report  under  this  article  to  contain  further  information  and  data  necessary 
for  the  computation  of  the  tax  herein  provided. 

§  214.  COMPUTATION  OF  TAX.  If  the  entire  business  of  the  corporation 
be  transacted  within  the  state,  the  tax  imposed  by  this  article  shall  be  based 
upon  the  entire  net  income  of  such  corporation  as  returned  to  the  United 
States  treasury  department  for  such  fiscal  or  calendar  year. 

If  the  entire  business  of  such  corporation  be  not  transacted  within  the 
state,  the  tax  imposed  by  this  article  shall  be  based  upon  a  proportion  of  the 
net  income,  to  be  determined  in  accordance  with  the  following  rules: 

The  proportion  of  the  net  income  of  the  corporation  upon  which  the  tax 
under  this  article  shall  be  based,  shall  be  such  portion  of  the  entire  net  in- 
come as  the  aggregate  of 


324  APPENDIX    G 

1.  The  average  monthly  value  of  the  real  property  and  tangible  personal 
property  within  the  state, 

2.  The  average  monthly  value  of  bills  and  accounts  receivable  for  (a) 
tangible  personal  property  sold  from  its  stores  or  stocks  within  the  state, 
(b)  tangible  personal  property  manufactured  or  shipped  from  within  the 
state  and  (c)  services  performed  within  the  state, 

3.  The  proportion  of  the  average  value  of  the  stocks  of  other  corpora- 
tions owned  by  the  corporation,  allocated  to  the  state  as  provided  by  this 
section, 

Bears  to  the  aggregate  of 

4.  The  average  monthly  value  of  all  the  real  property  and  tangible  per- 
sonal property  of  the  corporation,  wherever  located, 

5.  The  average  total  value  of  bills  and  accounts  receivable  for  (a)  tangible 
personal  property  sold  from  its  stores  or  stocks  within  and  without  the  state, 
(b)  tangible  personal  property  manufactured  or  shipped  from  within  this 
and  other  states  and  countries,  and  (c)  services  performed  both  within  and 
without  this  state, 

6.  The  average  total  value  of  the  stocks  of  other  corporations  owned  by 
the  corporation. 

Real  property  and  tangible  personal  property  shall  be  taken  at  its  actual 
value  where  located.  The  value  of  share  stock  of  another  corporation 
owned  by  a  corporation  liable  hereunder  shall  for  purposes  of  allocation  of 
assets  be  apportioned  in  and  out  of  the  state  in  accordance  with  the  value 
of  the  physical  property  in  and  out  of  the  state  representing  such  share 
stock. 

§  215.  RATE  OF  TAX.  The  tax  imposed  by  this  article  shall  be  at  the 
rate  of  three  per  centum  of  the  net  income  of  the  corporation  or  portion 
thereof  taxable  within  the  state,  determined  as  provided  by  this  article. 

§  216.  PENALTY  FOR  FAILURE  TO  REPORT.  Any  corporation  which  fails 
to  make  any  report  required  by  this  article  shall  be  liable  to  a  penalty  of 
not  more  than  five  thousand  dollars  to  be  paid  to  the  state,  to  be  collected 
in  a  civil  action,  at  the  instance  of  the  tax  commission;  and  any  officer  of 
any  such  corporation  who  makes  a  fraudulent  return  or  statement  with 
intent  to  defeat  or  evade  the  payment  of  the  taxes  prescribed  by  this  article 
shall  be  liable  to  a  penalty  of  not  more  than  one  thousand  dollars,  to  be 
collected  in  like  manner.  All  moneys  recovered  as  penalties,  for  a  failure 
to  report  or  for  making  fraudulent  reports  shall  be  paid  to  the  state  comp- 
troller. 

§  217.  POWERS  OF  TAX  COMMISSION.  The  tax  commission  may  for  good 
cause  shown  extend  the  time  within  which  any  corporation  is  required  to 
report  by  this  article.  If  any  report  required  by  this  article  be  not  made 
as  herein  required,  the  tax  commission  is  authorized  to  make  an  estimate 
of  the  net  income  of  such  corporation  and  of  the  amount  of  tax  due  under 
this  article,  from  any  information  in  its  possession,  and  to  order  and  state 
an  account  according  to  such  estimate  for  the  taxes,  penalties  and  interest 
due  the  state  from  such  corporation.  If  the  tax  imposed  upon  any  corpora- 
tion under  this  article  is  based  upon  an  estimate  as  provided  in  this  sec- 
tion, the  tax  commission  shall  notify  such  corporation  of  a  time  and  place 


NEW  YORK  STATE  INCOME   TAX  325 

at  which  opportunity  will  be  given  to  the  corporation  to  be  heard  hi  respect 
thereof.  Such  notice  shall  be  mailed  to  the  post-office  address  of  the  cor- 
poration. All  the  authority  and  powers  conferred  on  the  tax  commission 
by  the  provisions  of  section  one  hundred  and  ninety-five  of  the  tax  law 
shall  have  full  force  and  effect  in  respect  of  corporations  which  may  be 
liable  hereunder. 

§  218.  REVISION  AND  READJUSTMENT  OF  ACCOUNTS  BY  TAX  COMMIS- 
SION. If  an  application  for  revision  be  filed  with  the  commission  by  a  cor- 
poration against  which  an  account  is  audited  and  stated  within  one  year 
from  the  time  any  such  account  shall  have  been  audited  and  stated,  the 
commission  shall  grant  a  hearing  thereon  and  if  it  shall  be  made  to  appear 
upon  any  such  hearing  by  evidence  submitted  to  it  or  otherwise,  that  any 
such  account  included  taxes  or  other  charges  which  could  not  have  been 
lawfully  demanded,  or  that  payment  has  been  illegally  made  or  exacted  of 
any  such  account,  the  commission  shall  resettle  the  same  according  to  law 
and  the  facts,  and  adjust  the  account  for  taxes  accordingly,  and  shall  send 
notice  of  its  determination  thereon  to  the  corporation  and  state  comptroller 
forthwith. 

§  219.  REVIEW  OF  DETERMINATION  OF  TAX  COMMISSION  BY  CERTIORARI. 
The  determination  of  the  commission  upon  any  application  made  to  it  by 
any  corporation  for  revision  and  resettlement  of  any  account,  as  prescribed 
in  this  article,  may  be  reviewed  in  the  manner  prescribed  by  and  subject 
to  the  provisions  of  sections  one  hundred  and  ninety-nine  and  two  hundred 
of  this  chapter. 

§  2iga.  AUDIT  AND  STATEMENT  OF  TAX.  On  or  before  the  first  day  of 
November  in  each  year  the  tax  commission  shall  audit  and  state  the  ac- 
count of  each  corporation  known  to  be  liable  to  a  tax  under  this  article,  for 
its  preceding  fiscal  or  the  preceding  calendar  year,  and  shall  compute  the 
tax  thereon  and  forthwith  notice  the  same  to  the  state  comptroller  for  col- 
lection. The  tax  commission  shall  determine  the  portion  of  such  tax  to 
be  distributed  to  the  several  counties  and  the  amounts  to  be  credited  to  the 
several  cities  or  towns  thereof,  when  the  same  is  collected,  and  shall  indicate 
such  determination  in  noticing  such  tax  to  the  state  comptroller.  If  the 
corporation  has  real  property  or  tangible  personal  property  located  in  a 
village,  or  if  it  has  no  real  or  tangible  personal  property  in  the  state  but 
the  office  in  which  its  principal  financial  concerns  within  the  state  are  trans- 
acted is  located  in  a  village,  the  tax  commission  shall  indicate  such  facts 
to  the  state  comptroller,  with  the  name  of  the  village  hi  which  such  office 
or  property  is  located. 

§  2igb.  NOTICE  OF  TAX.  Every  report  required  by  section  two  hundred 
and  eleven  of  this  chapter  shall  contain  the  post-office  address  of  the  cor- 
poration and  lines  or  spaces  upon  which  the  corporation  shall  enter  the 
portion  of  its  net  income  which  it  believes  to  be  the  basis  upon  which  the 
tax  shall  be  imposed  under  this  article,  and  the  amount  of  such  tax.  No- 
tice of  tax  assessment  shall  be  sent  by  mail  to  the  post-office  address  given 
in  the  report,  and  the  record  that  such  notice  has  been  sent  shall  be  pre- 
sumptive evidence  of  the  giving  of  the  notice  and  such  record  shall  be  pre- 
served by  the  tax  commission. 


326  APPENDIX  G 

§  2igc.  WHEN  TAX  PAYABLE.  The  tax  hereby  imposed  shall  be  paid 
to  the  state  comptroller  on  or  before  the  first  day  of  January  of  each  year. 
If  such  tax  be  not  paid  on  or  before  January  first,  or  in  the  case  of  addi- 
tional taxes,  within  thirty  days  after  the  bill  for  such  additional  tax  has 
been  rendered,  the  corporation  liable  to  such  tax  shall  pay  to  the  state 
comptroller,  in  addition  to  the  amount  of  such  tax,  ten  per  centum  of  such 
amount,  plus  one  per  centum  for  each  month  the  tax  remains  unpaid. 
Each  such  tax  shall  be  a  lien  upon  and  binding  upon  the  real  and  personal 
property  of  the  corporation  liable  to  pay  the  same  from  the  time  when  it  is 
payable  until  the  same  is  paid  in  full. 

§  2igd.  CORRECTIONS  AND  CHANGES.  If  the  amount  of  the  annual  net 
income  of  any  corporation  taxable  under  this  article  as  returned  to  the 
United  States  treasury  department  is  changed  or  corrected  by  the  commis- 
sioner of  internal  revenue  or  other  officer  of  the  United  States  or  other  com- 
petent authority,  such  corporation,  within  ten  days  after  receipt  of  notice 
of  such  change  or  correction,  shall  make  return  under  oath  or  affirmation 
to  the  tax  commission  of  such  changed  or  corrected  net  income.  The  tax 
commission  shall  compute  the  taxes  which,  in  view  of  such  change  or  correc- 
tion, would  be  due  from  such  corporation  for  the  fiscal  or  calendar  year  for 
which  such  change  or  correction  is  made.  If  from  such  computation  it 
appear  that  such  corporation  shall  have  paid  under  this  article  an  excess 
of  tax  for  the  year  for  which  such  computation  is  made,  the  tax  commission 
shall  return  a  statement  of  the  amount  of  such  excess  to  the  comptroller, 
who  shall  credit  such  corporation  with  such  amount.  Such  credit  may  be 
assigned  by  the  corporation  in  whose  favor  it  is  allowed  to  a  corporation 
liable  to  pay  taxes  under  this  article,  and  the  assignee  of  the  whole  or  any 
part  of  such  credit  on  filing  with  the  commission  such  assignment  shall 
thereupon  be  entitled  to  credit  upon  the  books  of  the  comptroller  for  the 
amount  thereof  on  the  current  account  for  taxes  of  such  assignee  in  the 
same  way  and  with  the  same  effect  as  though  the  credit  had  originally  been 
allowed  in  favor  of  such  assignee.  If  from  such  computation  it  appear 
that  an  additional  tax  is  due  from  such  corporation  for  such  fiscal  or  calendar 
year,  such  corporation  shall,  within  thirty  days  after  notice  has  been  given 
as  provided  in  section  two  hundred  and  nineteen  b  of  this  chapter  by  the 
tax  commission,  pay  such  additional  tax. 

§  2196.  WARRANT  FOR  THE  COLLECTION  OF  TAXES.  If  the  tax  imposed 
by  this  article  be  not  paid  within  thirty  days  after  the  same  becomes  due, 
unless  an  appeal  or  other  proceeding  shall  have  been  taken  to  review  the 
same,  the  comptroller  may  issue  a  warrant  under  his  hand  and  official  seal 
directed  to  the  sheriff  of  any  county  of  the  state  commanding  him  to  levy 
upon  and  sell  the  real  and  personal  property  of  the  corporation  owning  the 
same,  found  within  his  county,  for  the  payment  of  the  amount  thereof,  with 
the  added  penalties,  interest  and  the  cost  of  executing  the  warrant,  and  to 
return  such  warrant  to  the  comptroller  and  pay  to  him  the  money  collected 
by  virtue  thereof  by  a  time  to  be  therein  specified,  not  less  than  sixty  days 
from  the  date  of  the  warrant.  Such  warrant  shall  be  a  lien  upon  and  shall 
bind  the  real  and  personal  property  of  the  corporation  against  whom  it  is 
issued  from  the  time  an  actual  levy  shall  be  made  by  virtue  thereof.  The 


NEW  YORK  STATE   INCOME   TAX  327 

sheriff  to  whom  any  such  warrant  shall  be  directed  shall  proceed  upon  the 
same  in  all  respects,  with  like  effect,  and  in  the  same  manner  as  prescribed 
by  law  in  respect  to  executions  issued  against  property  upon  judgments  of 
a  court  of  record,  and  shall  be  entitled  to  the  same  fees  for  his  services  in 
executing  the  warrant,  to  be  collected  in  the  same  manner. 

§  2191.  ACTION  FOR  RECOVERY  OF  TAXES;  FORFEITURE  OF  CHARTER  BY 
DELINQUENT  CORPORATIONS.  Action  may  be  brought  at  any  time  by  the 
attorney-general  at  the  instance  of  the  comptroller,  in  the  name  of  the 
state,  to  recover  the  amount  of  any  taxes,  penalties  and  interest  due  under 
this  article.  If  such  taxes  be  not  paid  within  one  year  after  the  same  be 
due,  and  the  comptroller  is  satisfied  that  the  failure  to  pay  the  same  is 
intentional  he  shall  so  report  to  the  attorney-general,  who  shall  immediately 
bring  an  action  in  the  name  of  the  people  of  the  state,  for  the  forfeiture  of 
the  charter  or  franchise  of  any  corporation  failing  to  make  such  payment, 
and  if  it  be  found  that  such  failure  was  intentional,  judgment  shall  be  ren- 
dered in  each  action  for  the  forfeiture  of  such  charter  and  for  its  dissolution 
if  a  domestic  corporation  and  if  a  foreign  corporation  for  the  annulment 
of  its  franchise  to  do  business  in  this  state. 

§  2igg.  DEPOSIT  OF  REVENUES  COLLECTED.  The  state  comptroller  shall 
deposit  all  taxes,  interest  and  penalties  collected  under  this  article  in  re- 
sponsible banks,  banking  houses  or  trust  companies  in  the  state  which  shall 
pay  the  highest  rate  of  interest  to  the  state  for  such  deposit,  to  the  credit 
of  the  state  comptroller  on  account  of  the  franchise  tax.  And  every  such 
bank,  banking  house  or  trust  company  shall  execute  and  file  in  his  office  an 
undertaking  to  the  state,  in  the  sum,  and  with  such  sureties,  as  are  re- 
quired and  approved  by  the  comptroller,  for  the  safe  keeping  and  prompt 
payment  on  legal  demand  therefor  of  all  such  moneys  held  by  or  on  de- 
posit in  such  bank,  banking  house  or  trust  company,  with  interest  thereon 
on  daily  balances  at  such  rate  as  the  comptroller  may  fix.  Every  such  un- 
dertaking shall  have  indorsed  thereon,  or  annexed  thereto,  the  approval 
of  the  attorney-general  as  to  its  form.  The  state  comptroller  shall  on  the 
first  day  of  each  month  make  a  verified  return  to  the  state  treasurer  of  all 
revenues  received  by  him  under  this  article  during  the  preceding  month, 
stating  by  whom  and  when  paid,  and  shall  credit  himself  with  all  payments 
made  to  county  treasurers  since  his  last  previous  return  pursuant  to  section 
two  hundred  and  nineteen  h  of  this  chapter. 

§  2iQh.  DISPOSITION  OF  REVENUES  COLLECTED.  The  state  comptroller 
shall  on  or  before  the  tenth  day  of  each  month  pay  into  the  state  treasury 
to  the  credit  of  the  general  fund  two-thirds  of  all  taxes,  interest  and  penal- 
ties received  by  him  under  this  article  during  the  preceding  month,  as  ap- 
pears from  the  return  made  by  him  to  the  state  treasurer.  The  balance 
of  all  taxes,  interest  and  penalties  collected  and  received  by  him  under  this 
article  from  any  corporation,  as  appears  from  the  return  made  by  him  to 
the  state  treasurer,  shall,  on  or  before  the  tenth  day  of  April,  July,  October 
and  January,  for  the  quarter  ending  with  the  last  day  of  the  preceding 
month,  be  distributed  and  paid  by  him  to  the  treasurers  of  the  several  coun- 
ties of  the  state  and  disposed  of  by  such  treasurers,  in  accordance  with  the 
following  rules: 


328  APPENDIX   G 

1.  If  the  corporation  has  no  real  property  or  tangible  personal  property 
within  the  state,  such  payment  shall  be  made  to  the  county  treasurer  of 
the  county  in  which  is  located  the  office  at  which  its  principal  financial 
concerns  within  the  state  are  transacted; 

2.  If  the  corporation  has  real  property  or  tangible  personal  property, 
as  shown  by  its  report  pursuant  to  section  two  hundred  and  eleven,  in  but 
one  city  or  town  of  the  state,  such  payment  shall  be  made  to  the  county 
treasurer  of  the  county  in  which  such  city  or  town  is  located; 

3.  If  the  corporation  has  real  property  or  tangible  personal  property  in 
more  than  one  city  or  town  of  the  state,  as  shown  by  its  report  pursuant  to 
section  two  hundred  and  eleven,  such  payment  shall  be  made  to  the  county 
treasurers  of  the  counties  in  which  such  cities  or  towns  are  located  in  the 
proportion  that  the  average  monthly  value  of  the  real  property  and  tangible 
personal  property  of  such  corporation  in  the  cities  and  towns  of  such  county 
bears  to  the  average  monthly  value  of  all  its  real  property  and  tangible 
personal  property  within  the  state; 

4.  In  making  such  payment  to  a  county  treasurer,  the  state  comptroller 
shall  indicate  the  portion  thereof  to  be  credited  to  any  city  or  town  within 
the  county  on  account  of  the  location  therein  of  its  principal  financial  office 
or  property  as  determined  by  the  preceding  subdivisions,  and  if  such  prin- 
cipal financial  office  or  property  is  located  in  a  village  shall  indicate  the  village 
in  which  it  is  located;  if  such  principal  financial  office  or  property  located 
in  a  city  or  in  a  town  outside  of  a  village,  the  whole  of  such  portion  shall  be 
paid  to  such  city  or  town  as  hereinafter  provided;  if  such  principal  financial 
office  or  property  is  located  in  a  village,  there  shall  be  paid  to  such  village 
as  hereinafter  provided  so  much  of  such  portion  credited  to  the  town  as  the 
assessed  valuation  of  the  real  and  personal  property  in  such  village  or  portion 
thereof  in  such  town  as  appears  by  the  last  preceding  town  assessment-roll 
bears  to  twice  the  total  assessed  valuation  of  the  real  and  personal  property 
in  such  town  as  appears  by  such  assessment-roll; 

5.  As  to  any  county  wholly  included  within  a  city  such  payment  shall  be 
made  to  the  chamberlain  or  other  chief  fiscal  officer  of  such  city  and  be  paid 
into  the  general  fund  for  city  purposes; 

6.  As  to  any  county  not  wholly  included  within  a  city  the  county  treas- 
urer shall  within  ten  days  after  the  receipt  thereof  pay  to  the  chief  fiscal 
officer  of  a  city  or  to  the  chief  fiscal  officer  of  a  village  or  to  the  supervisor 
of  a  town  the  portion  of  money  received  by  him  from  the  state  comptroller 
to  which  such  city,  village  or  town  is  entitled,  which  shall  be  credited  by  such 
officer  to  general  city,  village  or  town  purposes. 

§  2igi.  SECRECY  REQUIRED  OF  OFFICIALS;  PENALTY  FOR  VIOLATION,  i. 
Except  in  accordance  with  proper  judicial  order  or  as  otherwise  provided  by 
law,  it  shall  be  unlawful  for  any  tax  commissioner,  agent,  clerk  or  other 
officer  or  employee  to  divulge  or  make  known  in  any  manner  the  amount  of 
income  or  any  particulars  set  forth  or  disclosed  in  any  report  under  this 
article.  Nothing  herein  shall  be  construed  to  prohibit  the  publication  of 
statistics  so  classified  as  to  prevent  the  identification  of  particular  reports 
and  the  items  thereof,  or  the  publication  of  delinquent  lists  showing  the 
names  of  taxpayers  who  have  failed  to  pay  their  taxes  at  the  time  and  in 


NEW  YORK   STATE  INCOME   TAX  329 

the  manner  provided  by  section  two  hundred  and  nineteen-c  together  with 
any  relevant  information  which  in  the  opinion  of  the  comptroller  may  assist 
in  the  collection  of  such  delinquent  taxes;  or  the  inspection  by  the  attorney- 
general  or  other  legal  representatives  of  the  state  of  the  report  of  any  cor- 
poration which  shall  bring  action  to  set  aside  or  review  the  tax  based  thereon, 
or  against  whom  an  action  or  proceeding  has  been  instituted  in  accordance 
with  the  provisions  of  sections  two  hundred  and  sixteen  or  two  hundred  and 
nineteen-f  of  this  article. 

Reports  shall  be  preserved  for  three  years,  and  thereafter  until  the  state 
tax  commission  orders  them  to  be  destroyed. 

2.  Any  offense  against  the  foregoing  provision  shall  be  punished  by  a  fine 
not  exceeding  one  thousand  dollars  or  by  imprisonment  not  exceeding  one 
year,  or  both,  at  the  discretion  of  the  court  and  if  the  offender  be  an  officer 
or  employee  of  the  state  he  shall  be  dismissed  from  office  and  be  incapable 
of  holding  any  public  office  in  this  state  for  a  period  of  five  years  thereafter. 

§  2igj.  MANUFACTURING  AND  MERCANTILE  CORPORATIONS  EXEMPT 
FROM  PERSONAL  PROPERTY  TAX  AND  FROM  THE  PROVISIONS  OF  SECTIONS 
TWELVE,  TWENTY-SEVEN,  ONE  HUNDRED  AND  EIGHTY-TWO  AND  ONE  HUN- 
DRED AND  NINETY-TWO  OF  THE  TAX  LAW.  After  this  article  takes  effect 
manufacturing  and  mercantile  corporations  shall  not  be  assessed  on  any 
personal  property  which  for  the  purpose  of  this  exemption  shall  include  such 
machinery  and  equipment  affixed  to  the  building  as  would  not  pass  between 
grantor  and  grantee  as  a  part  of  the  premises  if  not  specifically  mentioned 
or  referred  to  in  the  deed,  or  as  would,  if  the  building  were  vacated  or  sold, 
or  the  nature  of  the  work  carried  on  therein  changed,  be  moved,  except 
boilers,  ventilating  apparatus,  elevators,  gas,  electric  and  water  power 
generating  apparatus  and  shafting.  After  this  article  takes  effect  manu- 
facturing and  mercantile  corporations  shall  not  be  assessed  or  taxed  upon 
their  capital  stock  as  provided  for  in  section  twelve  of  this  chapter,  nor  shall 
they  be  required  to  pay  the  franchise  tax  imposed  by  section  one  hundred 
and  eighty-two  of  this  chapter,  nor  to  make  the  reports  called  for  in  sections 
twenty-seven  and  one  hundred  and  ninety-two  of  this  chapter.  Nothing 
herein  shall  be  construed  to  impair  the  obligation  to  pay  franchise  taxes  due 
on  or  before  the  fifteenth  day  of  January,  nineteen  hundred  and  seventeen, 
or  taxes  on  personal  property  or  capital  stock  assessed  in  the  year  nineteen 
hundred  and  sixteen  or  hi  the  year  nineteen  hundred  and  seventeen  before 
this  article  takes  effect,  whether  payable  in  that  year  or  not.  But  if  any 
manufacturing  or  mercantile  corporation  shall  pay  taxes  on  personal  prop- 
erty or  capital  stock  assessed  in  any  tax  district  in  the  year  nineteen  hundred 
and  seventeen,  such  corporation  shall  be  entitled  to  credit  for  the  amount 
of  such  taxes  so  paid  on  its  account  for  taxes  first  assessed  against  it  under 
this  article  by  the  tax  commission,  not  exceeding,  however,  the  amount  of 
such  first  assessment. 

§  2igk.  LIMITATION  OF  TIME.  The  provisions  of  the  code  of  civil  proce- 
dure relative  to  the  limitation  of  time  of  enforcing  a  civil  remedy  shall  not 
apply  to  any  proceeding  or  action  taken  to  levy,  appraise,  assess,  determine 
or  enforce  the  collection  of  any  tax  or  penalty  prescribed  by  this  article. 

§  2.  The  sum  of  forty  thousand  dollars  ($40,000)  or  so  much  thereof  as 


330  APPENDIX   G 

may  be  needed  is  hereby  appropriated  to  the  state  comptroller  for  the  ex- 
penses to  be  incurred  by  him  in  administering  the  provisions  of  this  act; 
and  the  sum  of  seventy-five  thousand  dollars  ($75,000)  or  so  much  thereof 
as  may  be  needed  is  hereby  appropriated  to  the  state  tax  department  for  the 
expenses  to  be  incurred  by  such  department  in  administering  the  provisions 
of  this  act. 

§  3.  This  act  shall  take  effect  immediately. 


TABLE  OF  CASES 

PAGE 

Anderson  vs.  Forty-two  Broadway  Co.  (209  Fed.  991  and  213  Fed.  777)  104 

Baldwin  Locomotive  Works  vs.  McCoach  (221  Fed.  59) 106,  130,  187 

Baumbach  vs.  Sargent  Land  Co.  (219  Fed.  31) 299 

Brady  vs.  Anderson  (240  Fed.  665) 82 

Cedar  Street  Co.  vs.  Park  Realty  Co.  (T.  D.  1685) 295 

Cohen  vs.  Lowe  (234  Fed.  474) 178 

Commercial  Travelers'  Life  and  Accident  Assoc'n  vs.  Rodway  (235 

Fed.  370) 301 

Edwards  vs.  Keith  (224  Fed.  585  and  231  Fed.  no) 39 

Eliot  vs.  Freeman  (220  U.  S.  178) 299 

Flint  vs.  Stone  Tracy  Co.  (220  U.  S.  107) 295 

Grand  Rapids  &  Indiana  Ry.  Co.  vs.  Doyle  (T.  D.  2210) 102 

Herold  vs.  Park  View  Building  &  Loan  Assoc'n  (210  Fed.  577) 301 

Laurentide  Co.  (Ltd.)  vs.  Durey  (231  Fed.  223) 300 

Lewellyn  vs.  Pittsburgh,  B.  &  L.  E.  R.  R.  Co.  (222  Fed.  177) 299 

McCoach  vs.  Continental  Passenger  Ry.  Co.  of  Phila.  (233  Fed.  976) . .  299 

McCoach  vs.  Minehill  &  Schuylkill  Haven  R.  R.  Co.  (228  U.  S.  295) . .  296 

Maxwell  vs.  Abrast  Realty  Co.  (218  Fed.  457) 299 

Middlesex  Banking  Co.  vs.  Eaton  (221  Fed.  86) 204 

Miller  vs.  Snake  River  Valley  R.  R.  Co.  (223  Fed.  946) 299 

Mitchell  Bros.  vs.  Doyle  (225  Fed.  437) 130 

Mutual  Benefit  Life  Insurance  Co.  vs.  Herold  (198  Fed.  199) i8a 

P.  &  O.  Steam  Navigation  Co.  vs.  Leslie  (82  L.  T.  137;  4  Tax  Cas.  177 

Eng.) 192 

Pennsylvania  Life  Insurance  Co.  vs.  Meyer  (197  U.  S.  407;  25  Sup.  Ct. 

483;  49  L.  Ed.  810) 301 

Ricker  vs.  American  Tea  Co.  (140  Mass.  346) 299 

Rio  Grande  Junction  Ry.  Co.  vs.  U.  S.  (T.  D.  2345) 298 

-Selden  vs.  Equitable  Trust  Co.  (94  U.  S.  419) 205 

State  Line  &  S.  R.  Co.  vs.  Davis  (228  Fed.  246) 299 

Stratton's  Independence  (Ltd.),  vs.  Howbert  (231  U.  S.  399) 297 

Traction  Co.  vs.  Collectors  of  Int.  Rev.  (233  Fed.  984) 299 

Union  Hollywood  Water  Co.  vs.  Coster  (238  Fed.  329) 89,  in 

U.  S.  vs.  Acorn  Roofing  Co.  (204  Fed.  157) 300 

U.  S.  vs.  Emery-Bird-Thayer  Realty  Co.  (237  U.  S.  28) 297 

U.  S.  vs.  Guggenheim  Exploration  Co.  (238  Fed.  231) 130 

U.  S.  vs.  Military  Construction  Co.  (204  Fed.  153) 300 

U.  S.  vs.  Nippissing  Mines  Co.  (206  Fed.  431) 299 

U.  S.  vs.  The  Cleveland,  Cincinnati,  Chicago  and  St.  Louis  Ry.  Co. 

(Feb.  23,  1916,  U.  S.  Dist.  Court,  Southern  Dist.  of  Ohio) nr 

Waterbury  Gaslight  Co.  vs.  Walsh  (228  Fed.  54) 299 

Wilkes-Barre  &  W.  V.  Traction  Co.  vs.  Davis  (214  Fed.  511) 299 

Zonne  vs.  Minneapolis  Syndicate  (220  U.  S.  187) 295 


INDEX1 

Abatement;  claim  for if 

Abroad;  citizen  residing 14 

ABSENCE;  EXTENSION  OF  TIME  BECAUSE  OF: 

Corporation 78 

Individual 16 

Absence  abroad  does  not  absolve  from  making  return 15 

Accident  insurance 21 

Accident;  reimbursement  of  expenses  of 21 

ACCOUNT: 

Advertising 209 

Allowance 199 

Auditing  Expense 209 

Auto  Expense 209 

Bad  Debts 212 

Commissions 207 

Debentures 204 

Depletion 211 

Depreciation 211 

Discounts  Allowed 199 

Discounts  Received 199 

Dividends  Paid 215 

Dividends  Received 206 

Duties 210, 

Fire  Loss 210 

Freight  on  Purchases 200 

Freight  on  Sales 200,  209 

Fuel,  Light,  Power,  etc 207 

General  Factory  Expense 209 

Income  from  Sundry  Sources 206 

Insurance 209 

Interest  Paid 202 

Interest  Received 202 

Inventory 201 

Labor,  Wages  and  Commissions 207 

Leasehold 201 

Legal  Expense 209 

Light,  Heat  and  Power 207 

Merchandise 215 

Negative  (Note) 176 

Packing  Supplies 209 

Perpetual  Inventory 217 

Postage 209 

Productive  Wages 207 

1  Numbers  refer  to  pages  and  those  preceded  by  "L."  indicate  references 
to  text  of  the  Laws. 


334  INDEX 

ACCOUNT — Continued 

Production  Supplies 209 

Profit  and  Loss 215 

Purchases 200 

Rebates I99 

Rents  Paid 201 

Rents  Received 201 

Repairs 207 

Reserve  for  Depreciation 211 

Return  Sales ipo. 

Royalties 202 

Salaries  of  Officers 208 

Sales  (merchandise) 198 

Sales  of  Capital  Assets 210 

Shipping  Supplies 209 

Stable  Expense 209 

Stationery  and  Printing 209 

Sundry  Expense 209 

Surplus 215 

Taxes 212 

Telegraph  and  Telephone 209 

Traveling  Expense 209 

ACCOUNT;  BOOKS  OF: 

Best  Guide  to  Income 197 

Corporation's 196 

Examination  of,  by  Internal  Revenue  Officers 197 

Individual's 196 

Reconciliation  of,  with  return 216 

ACCOUNTS: 

Basis  of  keeping;  corporations  and  individuals 196,  L.  228,  238 

Basis  of  keeping;  of  partnerships 69 

Distribution  of 198 

Prepayment  of 197 

Reestablishing,  of  properties 131 

What  justifies  charging  off 213 

Worthless/**?  "Debts,  Bad.") 

Accounts  Receivable 212 

Accrual  basis  of  bookkeeping 196 

Accruals:  treatment  of  accruals  in  return 197 

Accrued  interest  on  bonds  purchased 52 

Accumulation  of  surplus 20,  73,  L.  221 

Act  of  1909,  Special  Excise  Tax  on  Corporations 305 

Act  of  1913,  Extracts  from  Income  Tax  Law  relating  to  Corporations. .  312 
Act  of  1916,  Federal  Corporation  Capital  Stock  Tax  Law  (Sept.  8, 1916)  285 

Act  of  1916,  Income  Tax  Law  (Sept.  8,  1916) 219 

Act  of  1917,  War  Revenue  Bill  (Oct.  3,  1917) 249 

Act  of  New  York  State  Income  Tax 321 

Actors  and  Actresses;  depreciation  of  costumes  of 188 

"Actually  paid"  or  "paid  during  the  year" 198 

ADDITIONAL  INCOME  TAX  (SURTAX): 

Computation,  examples  of 7,  8,  9 

Dividends  included  in  computing 2 

Rates  of. 2,  L.  219 


INDEX  335 

ADDITIONAL  INCOME  TAX  (SURTAX) — Continued 

Table  of,  under  Act  of  1913 320 

Undistributed  surplus  subject  to 20,  L.  221 

ADDITIONAL  WAR  INCOME  TAX  (SURTAX): 

Computation,  examples  of 7>  8,  9 

Dividends  included  in  computing 3 

Rates  of 4,  L.  249 

ADDITIONAL  INCOME  AND  WAR  INCOME  TAXES  (COMBINED): 

Computation,  examples  of 7,  8,  9,  10 

Rates  of 5 

Table  of,  on  various  amounts  of  income 10 

ADDITIONAL  TAXES: 

Computation,  illustration  of . 7>  8,  9 

Dividends  included  in  computing 2,  3 

Rates  of 2,  4,  5 

Undistributed  profits  subject  to 20 

Undistributed  surplus  of  corporation  subject  to 73 

Additions  and  betterments  (see  "Improvements"). 

Adjusting  excess  depreciation  deductions 195 

Administration  of  estates;  income  during 13,  37 

Administration  of  Excess  Profits  Tax 116 

Administation  of  Income  Tax  Law;  provisions  of 239 

Administrators  (see  "Fiduciaries"). 

Admissions;  War  Tax  on L.  271 

Advance  payment  of  taxes 18 

AGENT: 

Collecting  agent  of  foreign  income 45 

Foreign  corporation  represented  by 84 

Insurance  agent,  commissions  of 39 

Liability  of  making  return 84 

Power  of  attorney,  agent  under 13 

Real  estate  agent,  commissions  of 57 

Return  may  be  made  by 13 

Agreement  of  sale;  War  Tax  on L.  276 

Agricultural  corporations,  exempt 85 

ALIENS,  NONRESIDENT: 

Income  of,  subject  to  withholding 60 

ALIENS,  RESIDENT: 

Permanent  residence 65 

Temporary  residence 65 

Visiting 66 

Alimony,  not  income 45 

Allowance  account  (deductible  from  sales) 199 

Allowance  for  depreciation 177 

Amended  returns 161,  195 

Amended  Income  Tax  Statute  (Sept.  8, 1916) L.  219 

Amortization  of  bonds 177 

Amortization  of  capital  invested  in  munitions  plant 191 

Amortization  of  discounts  on  bonds 104 

Annual  return  (see  "Returns"). 

Annuities 21 

Appeal,  right  of 59,  L.  244 

Appendix  A,  Amended  Federal  Income  Tax  Law  (Sept.  8, 1916) L.  219 


336  INDEX 

Appendk  B,  War  Revenue  Law  (Oct.  3,  1917) L.  249 

Appendix  C,  Corporation  Capital  Stock  Tax  Law  (Sept.  8,  1916)  and 

Regulations L.  285 

Appendix  D,  Special  Excise  Tax  on  Corporations  (Aug.  5, 1909) L.  305 

Appendix  E,  Extracts  from  Federal  Income  Tax  Law  relating  to  Cor- 
porations (Oct.  3,  1913) L.  312 

Appendk  F,  Table  of  Additional  Taxes  imposed  upon  individuals  by 

Act  of  Oct.  3,  1913 L.  320 

Appendix  G,  New  York  State  Income  Tax  on  Manufacturing  and 

Mercantile  Corporations L.  321 

Apportioning  income  of  1916  and  1917 77 

Appreciation  in  value  in  good  will  (note) 23,  187 

Appreciation  in  value  of  assets  not  income 36 

Assessment  insurance  companies,  reserves  of 114 

ASSESSMENTS: 

Capital  Stock,  assessment  of,  not  income 92 

Capital  Stock,  assessments  of,  not  deductible  by  individuals 57 

Excess  profits  tax,  creditable L.  246 

General  assessment L.  230 

Local  benefits,  assessment  of 53 

Notice  of  assessment,  corporations 76 

Notice  of  assessment,  individuals 17 

Recovery  of 79 

Second  assessment 79 

ASSETS  : 

Computing  profit  on  sales  of 33,  34,  35 

Deferred 197 

Income  on  sales  of 33 

Treatment  of  depreciation  in  sales  of 34 

Associations;  income  of  mutual 91 

Attorney's  fees;  when  returnable 33 

Auto  trucks,  depreciation  of 186 

Automobiles,  War  Tax  on L.  268 

Auxiliaries,  depreciation  of 184 

Bad  debts 213 

BANKS: 

Depreciation  of  securities 187 

Doing  business  as  partnership 14 

Gross  profit  of 91 

Interest  on  deposits  in 45 

Returns  by  private  banks 14 

Taxes  on  stock  of 58 

Banking  department;  order  by  State  or  Federal 187 

Bankruptcy  of  debtor 213 

Batteries;  depreciation  of  storage 184 

BENEFICIARIES: 

Heirs  and  legatees,  income  of 37,  L.  220 

Income  received  by 37 

Proceeds  of  accident  policy :       21 

Proceeds  of  life  insurance 21 

Return  by 13,  37 

Undistributed  income  returnable  by  fiduciary 37 


INDEX  337 

Bequests  and  gifts,  exempt 37 

Betterments  (see  "Improvements"). 

Beverages,  War  Tax  on L.  258 

Board  and  lodging  in  lieu  of  cash 32 

Boards  of  trade,  exempt 84 

Boilers  and  engines,  depreciation  of 182 

Bonded  indebtedness 173,  215 

BONDS: 

Accrued  interest  on  bonds  purchased 52 

Amortization  of  bonds 177 

Charging  off  depreciation  of  bonds 187 

Debenture  bonds,  interest  on 204 

Discounts  on 104 

Discounts  on,  charged  off  prior  to  1909 106 

Exchange  of,  hi  reorganization 93 

Income  on  Government  bonds 40,  41 

Interest  on  bonds 104 

Liberty  Loan 41 

Premium  on  fidelity  bond  paid  by  employee 53 

Premium  on  bonds  purchased 105 

Redemption  of  bonds 105 

Tax-free  covenants  in  bonds 62,  L.  229 

Withholding  tax  from  interest  on  bonds 62 

BONUSES: 

Taxable  as  income  of  recipient no 

When  deductible 108 

BOOK  VALUE: 

Decrease  in  book  value  not  deductible 187 

Increase  in  book  value  not  income 187 

BOOKKEEPING  METHODS: 

Corporations' 196 

Cost-system 216 

Individuals' 196 

Bookkeeping  suggestions 196 

Books  of  Account  (see  "Accounts,  books  of"). 

BRANCHES,  FOREIGN: 

Corporations  having 84 

Rates  of  exchange  of 44 

BRANDS: 

Depreciation  of 188 

Loss  on  sale  of 188 

Brokers;  special  return  by  (names  of  customers,  etc.) L.  245 

BUILDINGS: 

Buildings  erected  by  tenant 180 

Depreciation  on  buildings,  generally 178 

Depreciation  on  dwellings 180 

Depreciation  on  factory  buildings 179 

Depreciation  on  farm  buildings 178,  181 

Determining  cost  of  buildings  for  depreciation  purposes 179 

Dilapidated  buildings  removed  by  authority  of  Government 57 

Improvements  and  betterments 56,  180 

Repairs  to  buildings 179 

Voluntary  removal  of  building 56 


338  INDEX 

BUSINESS: 

Doing  business;  what  constitutes 295 

Individuals  having  more  than  one  business 54 

Losses  in  business 54 

Place  of  business,  filing  returns  at 15 

Cabaret,  War  Tax  on 271 

Cables  and  wires,  depreciation  of 184 

CALENDAR  YEAR: 

Corporation  return  for 76,  L.  230 

Individual  tax  based  on n,  L.  226 

Cameras,  War  Tax  on L.  269 

Campaign  expenses 57,  1 13 

CAPITAL  ASSETS: 

Appreciation  in  value  of 187 

Depreciation  of 175 

Increase  or  decrease  in  book  value  of 160 

Losses  on 34,  210 

Profits  on 33,  35,  91,  210 

Sales  of ; 33,  210 

Treatment  of  depreciation  in  sales  of 34 

Valuation  of . . 35 

CAPITAL  EMPLOYED  IN  THE  BUSINESS: 

Definition  of 203 

Interest  deductible  based  on 203 

CAPITAL,  INVESTED  (EXCESS  PROFITS  TAX): 

Accounts  payable,  deduction  from 157,  163 

Accounts  receivable 155,  159 

Accruals  as 157,  163 

Bills  Payable 157,  163 

Bills  Receivable 155,  160 

Bonds,  discussion  of 173 

Bonds  payable 157,  163 

Books  of  account,  showing 130 

Books  of  account,  relation  of 130 

Buildings  as 156,  162 

Cash  as 155,  159 

Copyrights 1 29 

Definition  of 128 

Depreciation  charged  off  prior  to  incidence  of  Excise  Tax 161 

Depreciation  charged  off  in  excess 161 

Determined,  how 134 

Dividends  declared 157,  164 

Druggists,  capital  of 133 

Examples  of  computing 155-165 

Foreign  businesses 129 

Franchise 138 

Furniture  and  fixtures 156,  162 

Good  will 138,  157,  163 

Good  will,  trade-marks  and  franchises 138 

Good  will  written  off 131 

Individuals,  capital  of 129,  154 

Inventory  valuations 167 


INDEX  339 

CAPITAL,  INVESTED  (EXCESS  PROFITS  TAX) — Continued 

Investments  as 155,  160 

Land 156,  162 

Liberty  Loan  bonds 130 

Nominal  capital 133 

Organization  expenses 166 

Ownership,  partial  change  of 135 

Partnerships 1 28 

Patents 129 

Patterns  and  designs 167 

Plant  and  machinery 155,  160 

Plates  and  dies 167 

Prepayments 157,  163 

Professions 133 

Property  accounts,  depreciated 132 

Property  accounts,  reestablishing  in  books  of  account 131 

Property,  actual  value  of,  discussion 1 74 

Reorganization  after  Jan.  2,  1913 136 

Reserve  accounts  and  funds 138 

Reserve  for  amortization  of  bonds 140 

Reserve  for  bad  debts - 140 

Reserve  for  loss  on  investments 140 

Reserve  for  working  capital ; 140 

Reserve  for  depreciation  and  depletion 140 

Reserves,  generally 157,  164 

Revaluation  of  property 153 

Securities,  inventory  of,  by  dealer 167 

Stocks  and  bonds 128 

Stock  on  hand 155,  160 

Subscriptions  to  capital  stock 166 

Surplus 154,  158,  164 

Tangible  property,  value  of 129 

Trade-marks 138 

Treasury  stock 166 

Undistributed  surplus  of  taxable  year 128 

Capital  returned  to  stockholders 31 

CAPITAL  STOCK: 

Assessment  of  capital  stock  not  income 92 

Capital  stock  outstanding  at  close  of  year 212 

Depreciation  of  stock 187 

Dividends  on  stock  (see  "Dividends"). 

Estimating  value  of 302 

Exchange  of  property  for  stock 93 

Exchange  of  shares 27,  93 

Preferred,  interest  on 104 

Sale  of  rights  to  subscribe  to 30 

Sale  of  stock  at  premium 94 

Stock  having  no  par  value 203 

War  Tax  on  certificates  of L.  275 

Capital  Stock  Tax  Law  (Sept.  8,  1916) L.  285 

Capital  Stock  Tax  Law  Regulations 286 

Carrying  charges  of  real  estate  company 96 

Cemetery  companies,  exempt 85 


340  INDEX 

Certificates  of  indebtedness  of  U.  S.  accepted  in  payment  of  taxes ....     19 

Certificates  of  stock;  war  tax  on 275 

Charitable  organizations,  exempt 85 

Charities,  contributions  to 52,  L.  223 

Christmas  gifts  to  clergymen 33 

Cigars  and  tobacco,  War  Tax  on L.  264 

Citizen  residing  abroad  must  make  return 15 

Civic  league  or  association,  exempt 85 

CLAIMS: 

Abatement  of  assessment 17 

Excess  amounts  paid  to  Government 17 

Refund  of  taxes 17,  18 

Specific  exemptions 51 

Statute  of  limitation 59 

Clergymen;  income  of 33 

"CLOSE  CORPORATIONS": 

Dividends  credited  by 21 

Not  exempt 87 

Clubs  organized  for  pleasure  and  recreation,  exempt 85 

Collateral;  interest  on  debts  secured  by 204 

Collecting  agents  of  foreign  income 45,  L-  229 

COLLECTION  OF  TAX;  DDE  DATE  AND  PENALTY  FOR  DELAYED  PAYMENTS: 

Corporations 76 

Individuals 17 

COLLECTORS  OF  INTERNAL  REVENUE: 

Duties  of L.  241 

Returns  made  by  collectors  for  corporations 79 

Returns  made  by  collectors  for  individuals 17 

Commission  account 207 

COMMISSIONS: 

Insurance  agents' 39 

Labor,  wages  and  commissions 207 

Real  estate  agents' 57 

Salesmen's 33 

Trustee's 33 

When  returnable 33 

Compensation  of  trustee 33 

Compromise  of  penalty  for  failure  to  make  return 16 

Conservators  (see  "Fiduciaries"). 

Contingent  reserves 103,  138 

Contracting  corporations;  gross  income  of 90 

Contractor  doing  work  for  State 40 

Contributions  (bonus) 108 

Contributions  to  charities 52,  L.  223 

Contributions  to  campaign  expenses 113 

Conveyances,  War  Tax  on 277 

Co-operative  associations  (exempt) 85 

Co-partnerships  (see  "Partnerships"). 

Copyright;  depreciation  of 186 

CORPORATE  OBLIGATIONS: 

Exempt  organizations  subject  to  withholding  of  tax 86 

Interest  on  bonds,  mortgages,  and  deeds  of  trust 63 

Limitation  of  interest  deductible .  .  .  202 


INDEX  341 

CORPORATE  OBLIGATIONS— Continued 

Tax-free  covenant 62 

Corporation  Capital  Stock  Tax  Law L.  285 

Corporation  Capital  Stock  Tax  Regulations L.  286 

CORPORATIONS: 

Additions  and  betterments 180 

Agent  of  foreign 84 

Apportionment  of  income  for  1917 77 

Assessment  of  capital  stock  of 92 

Bonds  issued  at  discount 104 

Books  of  account 196 

Close  corporations 87 

Cost-system 216 

Deductions  (see  "Deductions  in  returns  of  corporations"). 
Dividends  (see  "Dividends"). 

Doubtful  as  to  exemption 87 

Exempt  organizations 84 

Exempt  organizations  includes  foreign,  of  the  same  classes 87 

Fiscal  year  of 77,  L.  237 

Foreign  income  of  domestic  corporations 73 

Foreign  branches 44>  80 

Gross  income  from  all  sources 90 

Gross  income  of  banks 91 

Gross  income  of  contracting  corporations 90 

Gross  income  of  insurance  companies 91 

Gross  income  of  manufacturing  corporations 90 

Gross  income  of  mercantile  corporations 90 

Gross  income  of  miscellaneous  corporations 90 

In  liquidation 82 

Income  of  domestic  corporations 72,  89,  L.  230 

Income  of  foreign  corporations 72,  L.  230 

Incompletely  organized  corporations 80 

Interstate  commerce 83 

Losses  of,  when  deductible 101 

Net  income 72 

Organized  during  the  year 81 

Return,  false  or  fraudulent 78 

Return,  foreign  corporations 76 

Return,  holding  companies 80 

Return,  mercantile  corporations 75,  76 

Return  prepared  by  Collector  of  Internal  Revenue 79 

Return,  refusal  or  neglect  to  prepare 79 

Return,  receivers  and  trustees 81 

Return,  specific  exemption 73 

Return,  subsidiary  companies 81 

Return,  when  due,  where,  etc 76,  L.  237,  238 

Return,  withheld  taxes 63 

Water  companies 89 

Year,  tax L.  237 

CORPORATIONS,  FOREIGN: 

Agent  of 84 

Deductions  allowed 114 

Dividends  of 31 


342  INDEX 

CORPORATIONS,  FOREIGN — Continued 

Income  of 72,  L.  235 

Where  to  file  return 76 

CORPORATIONS;  NONRESIDENT  FOREIGN: 

Withholding  tax  on  income  of 61 

COST  SYSTEM: 

Manufacturing  corporation  operating 216 

"Purchases"  according  to 200 

Reliability  of 200 

Cost  of  manufactures 216,  217 

COST  OF  PROPERTY  ACQUIRED  PRIOR  TO  MARCH  i,  1913: 

Corporations 91 

Individuals 35 

Cost  of  property  acquired  since  March  i,  1913 36 

Cost  of  real  estate 36 

Costumes  of  actors;  depreciation  of 188 

Courts;  jurisdiction  of L.  244 

Crop  snares;  farmers' 49 

Custom  House  entries;  War  Tax  on L-  277 

Customs  duties 59 

Damages  received  for  injuries  sustained 21 

Damage  suits,  test  of  deductibility  of  payment  of 57 

Debenture  bonds;  interest  on 204 

DEBTS,  BAD: 

Bankruptcy 213 

Corporations 102 

Deductible 213 

Individual 55 

Reserve  for 102 

Deceased  persons;  income  to  time  of  death  of 13 

DEDUCTIONS  IN  RETURNS  OF  DOMESTIC  CORPORATIONS: 

Allowable 100,  L.  233 

Amortization  of  bonds 177 

Bad  debts 102 

Bonuses 108 

Campaign  expenses 113 

Defalcation,  embezzlement in 

Depletion 101,  L.  233 

Depreciation 101,  L.  233 

Expenses,  necessary 100,  L.  233 

Improvements  (not  deductible) 1 10,  L.  234 

Interest .  . .  , 103,  L.  234 

Lobbying  expense in 

Losses 101,  L.  233 

Maintenance  expenses 102 

Organization  expenses in 

Premium  on  bonds 105 

Salaries  of  National  Guardsmen no 

Salesmen's  expenses no 

Taxes no,  212,  L.  235 

DEDUCTIONS  IN  RETURNS  OF  FOREIGN  CORPORATIONS: 

Depletion 1 14,  L.  236 


INDEX  343 

DEDUCTIONS  IN  RETURNS  OF  FOREIGN  CORPORATIONS — Continued 

Depreciation 114,  L.  235 

Improvements  (not  allowed) 115,  L.  236 

Interest 115,  L.  236 

Losses 114,  L.  235 

Necessary  expenses 1 14,  L.  235 

Restoring  property 115 

Taxes 115,  L.  237 

DEDUCTIONS  IN  RETURNS  OF  INDIVIDUALS: 

Accrual  basis  of  bookkeeping 196 

Bad  debts 55,  L.  223 

Contributions  to  charities ,52,  L.  223 

Depletion 56,  L.  223 

Depreciation 55,  L.  223 

Dividends 2,3 

Exemptions  (see  "Exemptions"). 

Improvements  (not  deductible) 56,  L.  223 

Interest 52,  L.  222 

Living  expenses  (not  deductible) 52 

Losses 54,  L.  222 

Necessary  expenses 52,  L.  222 

Nonresident  alien,  deductions  of L.  224,   225 

Normal  tax  withheld 52 

Only  items  applicable  to  the  year  deductible 33 

Prorating  compensation  of  trustees 33 

Taxes 53,  L.  222 

Taxes  on  bank  stock 58 

DEDUCTIONS  UNDER  EXCESS  PROFITS  TAX: 

Allowable 141 

Applicable  to  real  and  nominal  capital 152 

Foreign  nonresident  businesses 146 

Interest  on  capital 172 

Interest  on  loans  by  partners 171 

Representative  concerns 134,  147 

Salaries  of  partners  and  individuals 169 

Salary  allowance,  partnerships 148 

Wages,  members  of  farmer's  family 151 

Defalcation  when  deductible in 

Deferred  assets 197 

Delay  in  filing  return  (see  "Failure  to  file  return"). 

DELAYED  PAYMENT  OF  TAX;  PENALTY: 

Corporation 76 

Individual 17 

DEPLETION  OF  NATURAL  DEPOSITS: 

Deductible  by  corporations 181 

Deductible  by  individuals 56 

Deductible  by  nonresident  aliens 225 

Gas  and  oil  wells : 181 

Ledger  account  of  depletion 211 

Limitation  of  depletion 223 

Mines 181 

Purpose  of  depletion 211 


344  INDEX 

DEPRECIATION: 

Account  of  depreciation 211 

Adjusting  excess 195 

Deductible  by  corporation 100 

Deductible  by  individual 55 

Definition  of 175 

Diminishing  value  method 175 

Entries  of  depreciation 211 

Equal  instalment  method 175 

Excess  charge  for  depreciation 161,  195 

Fixing  upon  rates  of  depreciation 178 

Limitation  of  amount  chargeable 178 

Methods  of  computing 175 

Rates  of,  indicated  by  Department  (notes) 178,  182,  186 

Rates  of  depreciation,  generally 178 

Repairs  and  replacements 183 

Reserve  for  depreciation 176 

Treatment  of  depreciation  in  sales  of  capital  assets 34 

Property  subject  to  depreciation: 

Auto  trucks 186 

Auxiliaries 184 

Belted  generators 184 

Boilers 182 

Boot  trade 193 

Brands  (not  deductible) 188 

Breweries 193 

Buildings 178 

Collieries 193 

Copyrights 186 

Dwellings 180 

Dyers  and  trimmers 193 

Engines 182 

Farm  buildings 178,  181 

Furniture  and  fixtures 180 

Goodwill  (not  deductible) 187 

Horses 186 

Hosiery  trade 193 

Inventories 167,  188 

Investments  (not  deductible) 187 

Lace  makers 193 

Laundry  equipment 184 

Leased  property 180 

Looms 193 

Machinery 182 

Miscellaneous  equipment 184 

Motors 184 

Munitions  works 190 

Newspapers  and  printing 193 

Patents 185 

Patterns 185 

Rolling  stock 194 

Securities 167,  187 

Sewing  machines 193 


INDEX  345 

DEPRECIATION — Continued 

Shafting 184 

Ships 192 

Shipyards 194 

Shop  equipment 184 

Spinning  machinery 194 

Stable  equipment 186 

Steam  piping 184 

Steam  turbines 184 

Stock  on  hand 167,  188 

Stocks  and  bonds 187 

Storage  batteries 184 

Switchboards 184 

Theatre  costumes 188 

Timber  land 182 

Tools 184 

Trade-marks  (not  deductible) 188 

Tramways 194 

War  materials 190 

Weaving  trade 194 

Wires  and  cables 184 

Disclosing  information  prohibited L.  241 

Discounts  allowed 199 

Discounts  received 199 

Discount  on  bonds  charged  off  prior  to  Jan.  i,  1909 106 

DISCOUNTS;  RESERVE  FOR: 

Amortization  of  discounts  on  bonds 104 

Discounts  on  sales  of  merchandise 103 

DISSOLVED  CORPORATION: 

Liability  for  tax  of 82 

Return  of  capital  of 31 

Distribution  of  accounts 198 

District  Court,  jurisdiction  of L.  244 

Diverting  reserves 177 

DIVIDENDS: 

Accounts  of 206,  215 

Creditable  as  to  normal  tax 51,  L.  223 

Credits  to  partners  for  proportionate  share  of 70 

Declared  out  of  profits  earned  prior  to  March  i,  1913 22 

Declared  out  of  capitalized  good  will  (note) 23 

Declared  payable  in  securities 23,  91 

Definition  of 21,  L.  247 

Distributed  or  undistributed 21 

Double  tax  on 75 

How  taxable 21,  22,  23,  L.  247 

Life  Insurance  policies 20 

Must  be  included  in  return L.  228 

Not  subject  to  normal  tax 2,  3 

Received  by  corporations 75 

Received  by  individuals 21,  22,  23 

Received  by  nonresident  foreign  corporations 61 

Received  by  [nonresident  alien  individuals 60 

Received  by  partnerships 69 


346  INDEX 

DIVIDENDS — Continued 

Received  from  foreign  corporations 31 

Reserves,  dividends  paid  out  of 24,  25,  26 

Returns  of,  by  corporations  (names  of  stockholders) L.  245 

Stock  dividend 23 

Stock  dividend  to  nonresident  foreign  corporation 67 

Subject  to  additional  taxes 22,  L.  220 

Doctors,  fees  of 33 

Donations  (see  "Gifts"). 

Drafts,  Time,  War  Tax  on L.  277 

DUE  DATE: 

Payment  of  tax  by  corporations 76 

Payment  of  tax  by  individuals 17 

Return  of  corporations 76 

Return  of  individuals 15 

Return,  when  last  day  falls  on  Sunday  or  legal  holiday 76 

Dues,  War  Tax  on L.  271 

Duress,  payment  under 59 

Duty,  customs 59 

Duties  account 210 

Dwellings,  depreciation  of 180 

Embezzlement,  deduction  of 1 1 1 

Engines  and  boilers,  depreciation  of 182 

Entertainment  by  salesmen,  when  deductible no 

Estate  Tax,  War L.  278 

ESTATES: 

Exemption  of 51 

Income  of 37,  L.  220 

Sale  of  securities  by 35 

EXCESS  PROFITS  TAX: 

Administration  of 116,  152 

Assessment  deductible  from  income  tax 8,  10,  L.  246 

Capital  invested  (see  "Capital,  invested"). 
Deductions  allowed  (see  "Deductions"). 

Duration  of 118 

Examples  of  computing 142 

Exempt  organizations 117 

Incidence  of 1 18 

Income  exempt  from 117 

Invested  capital  (see  "Capital,  invested"). 

Investments,  income  from,  not  subject  to 126 

Landowner,  when  subject  to 1 23 

Method  of  computing,  where  capital  is  employed.  .142,  143,  144,  145 

Method  of  computing,  where  no  capital  employed 8,  145 

Mines,  oil  wells  and  timber  lands,  income  from 1 24 

Occupation  and  salary,  defined 123 

Old  tax  repealed 118 

Partners'  profits  not  subject  to 171 

Partnership,  assessment  of,  should  be  apportioned  to  partners. ...  121 

Partnership,  domestic,  returns  of 120 

Partnership,  foreign,  returns  of 121 

Penalties,  failure  to  make  return  and  for  false  return 121 


INDEX  347 

EXCESS  PROFITS  TAX — Continued 

Prewar  years  (see  "Prewar  period"). 

Principle  of  computing 118 

Rate  of,  where  no  capital  is  employed 119 

Rates  of,  where  capital  is  employed 118 

Real  or  nominal  capital 152 

Return,  due  date  of  filing 121 

Returns,  nonresident  aliens  and  foreign  corporations 120 

Taxable  year,  denned 119 

Undistributed  surplus  of  taxable  year 128 

Who  is  subject  to  tax 117 

Excess  Profits  Tax  Law  (Text  of) L.  251 

Exchange,  rates  of  foreign 44 

Exchange  of  stock  and  bonds  in  reorganization 93 

Excise  Tax  on  Corporations  (Act  of  1909) L.  305 

Executors,  returns  by 13 

EXEMPT  CORPORATIONS  AND  ORGANIZATIONS: 

Classes  of 84 

Doubtful  as  to  exemption 87 

Foreign 87 

Must  withhold  at  source 86 

Salary  received  from 32 

Water  companies,  not  exempt 89 

Exempt  income  of  individuals L.  221,  222 

Exempt,  tax,  clause  in  bonds 62 

EXEMPTIONS,  SPECIFIC: 

Claims  for 51 

Corporation  (under  Income  Tax  Law) 73 

Corporation  (under  Excess  Profits  Tax  Law) 141 

Estate 51 

Individual,  under  Income  Tax 2,  51 

Individual,  under  War  Income  Tax 3,  51 

Individual,  under  Excess  Profits  Tax 141 

Individual,  nonresident  alien 2,  51 

Prorating  exemption  between  husband  and  wife 12 

Ward,  cestui  que  trust 51 

Expense  accounts,  sundry 209 

Expenses,  necessary  to  business 52,  100 

Expenses  on  account  nontaxable  income $? 

EXTENSION  OF  TIME: 

Corporation 78 

Individual 16 

FAILURE  TO  FILE  RETURN,  PENALTIES  FOR: 

Compromises  of 16 

Corporations' 78 

Individuals' 16 

FAILURE  TO  PAY  TAX,  PENALTIES  FOR: 

Corporations' 76 

Individuals' 17 

FALSE  RETURNS,  PENALTIES  FOR: 

Corporations' 78 

Individuals' 17 


348  INDEX 

Family,  head  of,  defined  (note) 2 

Family,  head  of,  exemptions 51 

FARM  AND  FARMER: 

Books  of  account  of 50 

Buildings 178,  181 

Deductions  allowed  farmer 48 

Definition  of 48 

Depreciation  of  farm  property 50 

Expenses  of 49 

Income  of 49 

Losses  of 49 

Maintained  for  recreation  only 50 

Shares  in 49 

Stock  of 49>  So 

Federal  Corporation  Capital  Stock  Tax  Law  and  Rulings L.  285 

Federal  Farm  Loan,  interest  on,  exempt 40 

Federal  Income  Tax  Law  (Sept.  8,  1916) L.  219 

Federal  Trade  Commission 175 

Fees,  professional;  when  returnable 33 

Fidelity  bond,  premium  on 53 

FIDUCIARIES: 

Agents  are  not  fiduciaries 13 

Compensation  of 33 

Income  from 37 

Indemnity  to L.  221 

More  than  one  fiduciary 13 

Receivers 81 

Return  by 12,  L.  227 

FILING  RETURN: 

Due  date  of 16 

Where  to  file 15 

Final  returns  (see  "Tentative  returns")- 

Fire  insurance  premiums 57 

Fire  loss,  treatment  of  account  of 210 

FISCAL  YEAR  OF  CORPORATION: 

Extension  of  time 78 

How  to  adopt  fiscal  year 77 

When  return  is  due  under  fiscal  year 77 

When  tax  payable 78 

Fiscal  year  of  partnerships 68,  L.  227 

Floor  tax L.  270 

Foreign  corporations  (see  "Corporation,  Foreign "). 

Foreign  exchange,  rates  of 44 

FOREIGN  INCOME: 

License  required  by  collectors  of 45,  L.  229 

Of  nonresident  aliens 46 

Foreigners  (see  "Aliens"). 

Forms  must  be  obtained  by  taxpayer 12 

Fraud,  unreasonable  accumulation  of  surplus  evidence  of 20,  L.  221 

Freight  on  purchases 200 

Freight  on  sales 200,  209 

Fuel,  light  and  power 207 

Funds  and  Reserves 138 


INDEX  349 

"Fundamentals  of  a  cost-system  for  manufactures" 175 

Furniture  and  fixtures 180 

GAS  WELLS: 

Depletion  of 56,  181 

Royalties 181 

Generators,  depreciation  of  belted  generators 184 

GIFTS: 

Bonuses 108 

Christmas  gifts 109 

Exemption  of 37,  L.  222 

Gratuities,  test  of  deducibility 108 

Income  from  gifts 37 

Received  by  clergymen 33 

GOOD  WILL: 

Depreciation  of 187 

Dividend  declared  out  of  capitalized  (note) 23 

Invested  capital 131,  138,  157,  163 

Treatment  of  account 187 

Government,  foreign,  income  of L.  246 

GOVERNMENT  BONDS,  INCOME  FROM: 

Liberty  Bonds,  3^  per  cent 41 

Liberty  Bonds,  4  per  cent 41 

Miscellaneous 40 

Government  employees,  income  and  expenses  of 41 

Gratuities  («*  "Gifts"). 

GROSS  INCOME: 

All  sources 90 

Banks 91 

Contracting  corporations 90 

Insurance  companies 91 

Manufacturing  corporations 90 

Mercantile  corporations 90 

Miscellaneous  corporations 00 

GUARDIANS: 

Deduction  of  exemption  of  ward  or  ceslui  que  trust 51 

Return  by 12,  L.  227 

Gum,  chewing,  War  Tax  on L.  269 

HEAD  OF  FAMILY: 

Definition  of (note)  2 

Exemptions  of 51 

Heat,  light  and  power  account 207 

Heirs  and  legatees,  income  returnable 37 

Holding  companies,  returns  of 80 

Holiday,  when  due  date  falls  on 76 

Horses,  depreciation  of 186 

Horticultural  organizations 85 

Household  expenses;  not  deductible 52 

How  to  adopt  fiscal  year  of  corporation 77 

HUSBAND  AND  WIFE: 

Exemption  of,  may  be  prorated 12 

Returns  by 12 


350  INDEX 

HUSBAND  AND  WIFE — Continued 

Separate  income,  computing  additional  tax 12 

Specific  exemption 51 

Impairment  of  capital  account 215 

IMPROVEMENTS: 

Betterments 56 

Leased  property 180 

Local  benefits 53 

Not  deductible 56 

Repairs 179 

In  trade,  denned 54,  55 

INCOME: 

Accrued 197 

Apportionment  of  income  for  1916  and  1917  in  case  of  designated 

fiscal  year 77 

Appreciation  in  value,  not  income 36 

Attorneys'  fees 33 

Beneficiaries 37 

Bonuses 32,  108,  no 

Clergymen 33 

Commissions  of  insurance  agents 39 

Corporations,  domestic 72,  88,  L.  230 

Corporations,  foreign 72,  L.  235 

Deduction  from  (see  "Deductions"). 

Estates 37 

Exempt  from  tax L.  221,  L.  233 

Government  employees 41 

Gross  income  (see  "Gross  Income"). 

Heirs  and  legatees 37 

In  trade 55 

Individuals 19 

Instalment  business 98 

Interest  (see  "Interest"). 

Legacies. 37 

Money  equivalent 32 

Oil  wells,  mines,  and  timber  lands 124 

Partnerships,  general 69 

Partnerships,  limited 70 

Professional  services 33 

Promissory  note 36 

Public  utility L.  233 

Real  estate  development  corporation 94,  95 

Rents,  when  returnable 39 

Return  (see  "Returns"). 

Salaries,  when  returnable 31 

Sale  of  stock  rights 30 

Sinking  fund,  interest  on 92 

Stock  received  in  reorganization 29 

Subject  to  withholding 60 

Sundry  sources 206 

Table  of  rates  on  various  amounts  of  (individuals) 10 

Timber,  lumber  and  stumpage 99 


INDEX  351 

INCOME— -^Continued 

Undivided  surplus  of  corporations 20 

Income  taxes  applicable  to  income  of  year  1917 i 

Income  taxes  paid  not  deductible 53 

Incorporation  expenses in 

Indebtedness,  bonded,  interest  paid  on 173,  215 

Indebtedness,  interest  bearing 215 

Indemnity  to  withholding  party 63 

INDIVIDUALS: 

Deductions  of 51 

Income  of 19 

Income  of  nonresident  aliens 60 

Returns  of n 

Information  at  source 63,  L.  246 

Inheritance  tax,  not  deductible 58 

Injuries,  damages  received  on  account  of 21 

Instalment  business 94,  98 

Instalment  payment  of  taxes 18 

INSURANCE: 

Accident 21 

Account  of 209 

Agents. 39 

Annuities ; 21 

Damages 21 

Dividends 20 

Injuries 21 

Losses  not  compensated  for  by 57 

Partnership  and  corporation 69,  107,  L.  247 

Premiums,  fire 57 

Premiums,  life 58 

Proceeds  of  policy  of 21,  L.  221 

Reserves  for 57 

Settlement  under  state  compensation  laws (note)  21 

War  tax  on L.  267 

INSURANCE  COMPANIES: 

Additions  to  reserve  funds 113 

Assessment  companies 114 

Gross  income  of 91 

Losses  by 113 

Mutual , 91 

Reserves  of 114 

Returns  of 75 

Interstate  Commerce  corporation,  return  of 83 

INTEREST: 

Account 202 

Accrued  on  bonds  bought 52 

Annuities 21 

Bank  deposits 45 

Bonds,  information  at  source 65,  L.  246 

Collateral  subject  to  sale,  etc 104 

Cost  of  manufactures 200 

Debenture  bonds 204 

Deductible  by  corporations 103,  104 


352 


INDEX 


INTEREST — Continued 

Deductible  by  individuals 52 

Government  bonds 40,  41 

Incurred  in  purchase  of  Liberty  Loan  Bonds,  4% 52,  103 

Liberty  bonds,  3^2% 4* 

Liberty  bonds,  4%. 41,  103 

Limitation  of  corporations 202 

Obligations  of  State L.  222 

Preferred  Stock 104 

Sinking  funds 93 

Tax-free  covenant 62 

Withholding  at  source  on 62,  63 

INTERNAL  REVENUE  OFFICERS: 

Examination  of  books  by 197 

When  returns  may  be  prepared  by 17 

INVENTORIES  (STOCK  ON  HAND): 

Account 201 

Depreciation  of 188 

Equivalent  of 217 

Valuations  of 167 

Invested  capital  (see  "Capital,  invested"). 

Investments,  depreciation  of 56 

Investments,  foreign,  rates  of  exchange  on 44 

Jewelry,  War  Tax  on L.  269 

Joint  fiduciaries 12 

Journal  entries  of  depreciation 211 

Joint-stock  companies  (see  "Corporation"). 

Judgments,  test  of  deducibility  of 57 

Jurisdiction  of  District  Court L.  244 

Labor,  wages  and  commissions 207 

Land,  not  subject  to  depreciation 179 

Land,  timber 182 

Last  day,  when  last  day  to  file  returns  falls  on  Sunday  or  legal  holiday . .  76 

Laundry  equipment,  depreciation  of 184 

Lawyer's  fees,  when  returnable 33 

LEASED  PROPERTY: 

Additions  to 180 

Permanent  buildings  erected  by  tenant 180 

Leasehold  account 201 

Legacies,  not  income 37 

Legatees,  income  of,  returnable 37 

Liberty  Loans,  interest  on 41,  103 

License  required  by  collecting  agents 45 

Life  insurance  (see  "Insurance"). 

Limitations,  statute  of  (see  "Statute  of  Limitations"). 

LIMITED  PARTNERSHIPS: 

How  created 70 

Profits  of 31 

Returns  of 70 

Liquidation,  corporation  in 31 

Liquors,  War  Tax  on L.  258 


INDEX  353 

Living  expenses,  not  deductible 52 

Living  quarters  part  of  compensation 32 

Local  benefits,  not  deductible S3 

Lodging,  board  and,  in  lieu  of  money 32 

LOSSES: 

Bad  debts  (see  "Debts,  bad")- 

Deductible  by  domestic  corporation 101 

Deductible  by  foreign  corporation 114 

Deductible  by  individual 54 

Deductible  by  nonresident  alien L.  224 

Definition  of 54 

Farms  and  farmers 49 

Fluctuating 56 

In  trade 54,  55 

Retirement  of  bonds 106 

Speculations,  losses  in 55 

When  deductible 101 

Lumber,  and  stumpage,  profit  or  loss  on 99 

Machinery,  depreciation  of 182 

Mailing  returns  in  due  time 76 

Maintenance  expenses 102 

MANUFACTURING  CORPORATION: 

Cost-system  of 216 

Gross  income  of 90 

Market  value  of  securities,  how  determined 35 

MARRIED  PERSON: 

Exemption  of 51 

Status  of,  when  determined 51 

" Massachusetts  Trusts" 294,  299 

Medicines,  War  Tax  on L.  269 

MERCANTILE  CORPORATION: 

Gross  income  of 90 

MERCHANDISE: 

Account 215 

Allowances 199 

Purchases  of 200 

Sales  of 198 

METHOD  OF  BOOKKEEPING: 

Corporations 196 

Cost-system 216 

Individuals 196 

METHOD  OF  COMPUTING  TAX: 

Excess  profits 142,  143,  144,  145 

Normal  and  additional 6,  7,  8,  9 

Military  service,  verification  of  returns  of  persons  in 15 

Mines,  depletion  of 56 

Mines,  oil  wells,  and  timber  lands,  income  from 124 

Miscellaneous  corporations,  gross  income  of 90 

Misrepresentation  by  omission  or  declaration 196 

Money  equivalent,  income  received  in 32 

Motors,  depreciation  of 184 

Municipalities,  interest  on  obligations  of 39 


354 

Munitions  Tax  creditable  (Capital  Stock  Tax) L.  286 

Mutual  insurance  companies,  income  of 91,  L.  236 

National  guardsmen,  salaries  of no 

Nationality  of  husband,  wife  assumes 66 

Naval  service,  verification  of  returns  of  persons  in 15 

Negative  account (note)  176 

NET  INCOME  DEFINED: 

Corporations 89 

Individuals 19,  L.  220 

New  York  State  Income  Tax  Law L.  321 

Nonresident  citizen  required  to  make  return 15 

NONRESIDENT  ALIEN: 

Deductions  of L.  224,  225 

Exemption  (None) 51 

Foreign  income  of 46 

Income  of L.  219 

Return,  where  filed 15 

Stock  of,  held  by  another 46 

Withholding  from  income  of 60,  L.  228 

NONTAXABLE   INCOME: 

Corporations L.  233 

Individuals L.  221 

NORMAL  TAX: 

Dividends  not  subject  to 51,  L.  223 

Examples  of  computing 6 

Income  Tax 2,  L.  219 

Limited  partnerships,  distributed  income  of,  not  subject  to 31 

War  Income  Tax 3,  L.  249 

NOTES,  PROMISSORY: 

Equivalent  to  cash  receipts 36 

War  Tax  on L.  277 

NOTICE  OF  ASSESSMENT  BY  COLLECTOR: 

Corporation 76 

Individual 17 

NOTICE  TO  COLLECTOR: 

Corporation  designating  fiscal  year 77 

Extension  of  tune 78 

Obligations  of  Government,  interest  on 40 

Obsolescence  as  element  of  loss (note)  175 

Office  equipment 180 

Officers'  salaries 208 

OIL  WELLS: 

Depreciation  of 56 

Income  of 1 24 

Ores,  depletion  of  (see  "Mines"). 

Organization  expense,  not  deductible in 

Organizations  exempt 84 

Paid:  "actually  paid"  or  "paid  during  the  year" 198 

Parcel  post  packages,  War  Tax  on L.  278 

PARTNERS: 

Creditable  with  share  of  excess  Profits  Tax  assessment.  .  .121 


INDEX  355 

PARTNERS — Continued 

Credits  on  individual  returns  of 70 

Drawing  accounts  of 148 

Life  insurance  of 69,  107 

Returns  of 68 

Salaries  of 169 

Subject  to  income  taxes  only 68 

PARTNERSHIPS: 

Dividends  received  by 69 

Exclusion  of  interest  on  Government  obligations  in  returns  of . .  70,  L.  227 

Expenses  of 70 

Fiscal  year  of 68,  L.  227 

Income  of 69 

Income  Tax,  Returns  of 68,  L.  227 

Limited  partnership,  taxable  as  corporation 70 

Not  required  to  make  income  tax  return  unless  order 68,  L.  227 

Foreign,  not  subject  to  withholding 61 

Profits,  distributed  or  not 69,  L.  227 

Profits,  when  accrued ^ 69 

PARTNERSHIPS,  LIMITED: 

How  created 70 

Make  returns  as  corporations 70 

Profits  of 31,  71 

PATENTS: 

Depreciation  of 185 

Royalties  from 202 

Patterns,  depreciation  of 185 

PAYMENT  OF  TAXES: 

By  instalments 18 

Certificates  of  indebtedness  of  the  U.  S 19 

Uncertified  cheques 19 

When  due 17,  76 

PENALTIES  FOR  DELAYED  PAYMENT  OF  TAX: 

Corporations 76,  L.  239 

Individuals 17,  L.  228 

PENALTIES  FOR  FAILURE  TO  FILE  RETURN: 

Corporations 78,  L.  243 

Individuals 16,  L.  243 

PENALTIES,  SUNDRY: 

False  or  fraudulent  return 78,  L.  240 

Refusal  or  neglect  to  make  return 79,  L.  240 

PENSIONS: 

Paid  to  retired  employees 53,  no 

Received  from  United  States 45 

Perfumes  and  toilet  articles,  War  Tax  on L.  269 

Permanent  improvements  (see  "Improvements"). 

Personal  exemptions 51 

Philippine  Islands,  taxes  not  applicable  to 19 

Pianos,  War  Tax  on L.  268 

Piping,  steam,  depreciation  of 184 

PLACE  OF  BUSINESS,  FILING  RETURNS  AT: 

Domestic  corporations 76 

Foreign  corporations 76 


356  INDEX 

PLACE  OF  BUSINESS,  FILING  RETURNS  AT — Continued 

Individuals 15 

Nonresident  aliens 15 

Subsidiary  companies 81 

Playing  cards,  War  Tax  on L.  278 

Political  campaign  expenses 57,  113 

Political  subdivision,  defined 40 

Porto  Rico,  taxes  not  applicable  to 19 

Postal  Rates,  War  Tax  on L.  281 

Power,  fuel,  light,  etc 207 

Power  of  attorney,  agent  acting  under 13 

Power  of  attorney,  War  Tax  on L.  277 

Preferred  stock,  interest  on,  not  deductible 104 

PREMIUMS: 

Bonds  purchased 105 

Bonds  redeemed 105 

Fidelity  bond,  paid  by  employee 53 

Fire  insurance  •  •...•; 57 

Life  insurance,  individuals 58 

Life  insurance  in  favor  of  partnership  or  corporation.  .  69,  107,  L.  247 

Prepayments,  treatment  of,  in  returns 197 

PRESIDENT  OF  UNITED  STATES: 

Inspection  of  return  subject  to  order  of 79 

Salary  of,  exempt 51 

PREWAR  PERIOD  (EXCESS  PROFITS  TAX): 

Business  not  in  existence  during 146 

Definition  of 120 

Returns  for,  corporations 121 

Returns  for,  individuals 123 

Returns  for,  limited  partnerships 122 

Returns  for,  partnerships 123 

Returns  for,  when  required 121 

Returns  for,  when  not  required 172 

Subnormal  profit  in 146 

Price:  Fair  market  price  or  value 35 

Professional  fees,  when  returnable 33 

Profit  and  Loss  account 215 

PROFIT: 

Accumulation  of  profit  of  corporation 73 

Definition  of 36 

In  trade 55 

Sales  of  capital  assets 33,  34,  35 

Profit  returnable  by  legatee 37 

Promissory  note,  income 36 

Property  acquired  by  gift 37 

PROPERTY  ACQUIRED  PRIOR  TO  MARCH  i,  1913: 

Computing  profit  or  loss  on 33,  34,  35,  L.  221,  231 

Property:  Restoring  property 56 

PRORATING: 

Cost  of  improvements  by  tenant 180 

Exemption,  husband  and  wife 12 

Loss  on  sale  of  bonds 104 

Profit  or  loss  on  sale  of  capital  assets 34,  210 


INDEX  357 

Protest  to  assessment  and  collection 59 

Proxies,  War  Tax  on L.  277 

Public  records,  returns  become 79,  L.  240 

Public  utilities,  War  Tax  on '. L.  265 

Public  utility,  payments  to  Government  by in 

PURCHASES: 

Account  of 200 

Discounts  received  on 199 

Merchandise 215 

Freight  on 200 

Railroad  company,  damages  received  from 21 

Ranches  (see  "Farms"). 
RATES  OF  INCOME  TAXES: 

Corporations 72,  L.  230 

Individuals 2,  3,  4,  5 

Table  of,  on  various  amounts 10 

RATES  OF  EXCESS  PROFITS  TAX: 

Capital 118 

Nominal  capital 119 

Rates,  water 53 

Rates  of  depreciation 178 

Real  estate,  sales  of 36,  94,  96 

REAL  ESTATE  AGENTS: 

Commissions  paid  to 57 

REAL  ESTATE  COMPANIES: 

Accounts  of 94 

Development  corporations 94 

Property  collateral  of 104 

Rebates 199 

Receipts  for  taxes  paid 17,  L.  243 

Receivers  (see  "Fiduciaries"). 

Record  owner  of  stock  not  actual  owner 46 

Redemption  of  bonds 105 

Refund,  claims  for 17 

Refusal  to  file  (see  "Penalties"). 

Regulations,  Corporation  Capital  Stock  Tax  Law L.  286 

Renewals  and  improvements 102 

Renewals  of  office  equipment 180 

RENT: 

Account  of 39,  201 

Crop  shares  received  by  farmer 48 

Interest  paid  in  lieu  of 202 

Real  estate  agent  collecting 57 

When  returnable 39 

Rental  value  as  income 32 

Rents:  Paid  and  received 201 

REORGANIZATION  : 

Exchange  of  stock  and  bonds  in 93 

Stock  received  in 29 

REPAIRS: 

Buildings 179 

Incidental 183 


358  INDEX 

REPAIRS — Continued 

When  deductible 183 

Replaced  buildings 56 

Replacements,  test  of  deductibility 183 

RESERVES: 

Bad  debts 102 

Contingent 103 

Depreciation 176 

Discounts  on  sales 103 

Diverting  reserves 177 

Dividends  paid  out  of 24 

Insurance 57 

Insurance  companies 103 

Miscellaneous,  as  invested  capital 140,  157,  164 

Secret 103 

Separate  accounts  of 177 

Sinking  fund 103 

RESIDENCE: 

Citizen  residing  abroad 15 

Definition  of 65,  66 

Depreciation  of  dwelling 180 

Resident  alien 65 

Temporary,  in  the  U.  S 65 

Retirement  of  bonds,  loss  in 105 

Restoring  property,  not  deductible 56 

RETURN: 

By  agent 13,  L.  226 

Defined 1 1 

Publicity  of 79 

Receivers  and  trustees  must  make L.  238 

Reconciliation  of,  with  books  of  account 216 

Taxes,  withheld 63 

Tentative  and  amended 80 

Verification  of,  by  inspectors  of  Internal  Revenue 197 

Where  to  file 15 

RETURNS  OF  CORPORATIONS: 

Amended 80 

Books  of  account 196 

By  receivers 81 

Designating  fiscal  year 77 

Dissolved  corporation 82 

Due  date  of 76 

Extension  of  time  to  file 78 

Failure  to  file,  penalty 78 

False  or  fraudulent 78 

Form  of  return 75 

Holding  companies 80 

How  executed 76 

Incompletely  organized  corporation 80 

In  liquidation 82 

Insurance  companies 75 

Interstate  commerce 83 

Publicity  of 79 


INDEX  359 

RETURNS  OF  CORPORATIONS — Continued 

Refusal  to  file 79 

Subsidiary  companies 81 

Suggestions  as  to  preparation  of 196 

Tentative 80 

When  due 76 

When  Internal  Revenue  officer  will  prepare  return 79 

When  tax  payable 76,  78 

Where  filed 76 

RETURNS  OF  INDIVIDUALS: 

By  agent 13 

By  husband  and  wife 12 

Books  of  account 196 

Citizen  residing  abroad 15 

Delayed 16 

Extension  of  time  to  file 16 

Fiduciaries 12 

Form  of  return n 

Failure  to  file,  penalty 16 

False  or  fraudulent 17 

Liability  of  agent  making  return 13 

Refusal  to  file 17 

Verification  of 15 

When  due 16 

Where  filed 15 

When  Internal  Revenue  officer  will  prepare 17 

Who  is  required  to  make  return 10 

Returns,  conditions  of  inspection  of •. L.  240 

Returns,  monthly,  under  Excise  Tax L.  270 

Returns  of  exempt  organizations 86 

Returns  of  fiduciaries 12 

Returns  of  nonresident  aliens 15 

RETURNS  OF  GENERAL  PARTNERSHIPS: 

Accrual  basis 68 

Credits  on 70 

When  required 68 

RETURNS  OF  LIMITED  PARTNERSHIPS: 

Same  as  corporations 70 

Returns  of  private  banks 14 

Revenue  Law,  War L.  249 

"Rights,"  sale  of 30 

Royalties  received  and  paid 202 

SALARIES: 

Based  on  stockholdings 208 

Bonuses 108 

Commissions 207 

Exempt 51,  L.  222 

Information  at  source 63,  64 

National  Guardsmen no 

Ofikers 208 

Paid  by  stock 32 

Received  from  exempt  corporation 32 


360  INDEX 

SALARIES — Continued 

When  returnable 31 

Sale,  agreement  of:  War  Tax  on L.  276 

SALES: 

Account  of  (merchandise) 198 

Capital  stock  sold  at  premium 94 

Freight  on 200,  209 

Instalment  business 94,  98 

Profit  on  sales  of  capital  assets 33,  34,  35 

Real  estate  development  corporation 94 

Reserve  for  discounts  on  sales  of  commodities 103 

Sales  of  capital  assets 33,  91 

Sales  of  property  acquired  prior  to  March  i,  1913 34 

Salesmen,  commissions  of 33 

Salesmen,  expenses  of no 

Salvage  value  of  goods  returned 98 

Scrip  dividends 3° 

Second  assessments 79 

Secured  debts,  interest  on 104 

SECURITIES: 

Dividends  paid  by 23,  91 

Fair  market  value  of 35 

Inventory  valuations  by  dealers 167 

Profit  or  loss  on,  acquired  prior  to  March  i,  1913 35 

Service  connections,  water  company in 

Services,  professional,  when  returnable 33 

Shafting,  depreciation  of 184 

Ships,  depreciation  of 192 

Shipwrecks,  losses  by L.  222 

SICKNESS: 

Extension  of  time  to  file  return  on  account  of 78 

Corporations 7$ 

Individuals 16 

Return  by  agent 13 

Single  or  married  status 51 

Sinking  fund,  not  deductible 103 

Sinking  fund,  interest  on,  is  income 92 

Source,  information  at 63 

Source,  return  of  tax  withheld  at 63 

Specific  exemptions  (see  "Exemptions,  specific"). 

Spirits,  War  Tax  on  distilled L.  258 

Sporting  goods,  War  Tax  on L.  269 

Stable  equipment,  depreciation  of 186 

Stamp  Taxes,  War L.  272 

STATE: 

Compensation  of  employees  of .  , 51 

Contractor  doing  work  for 40 

Definition  of L.  240 

Interest  on  obligations  of 4° 

STATUTE  OF  LIMITATIONS: 

Claims  for  refund  under  old  law 18 

Recovery  of  tax  paid 59 

Return  may  be  made  by  Internal  Revenue  officer  within  three  years     1 7 


INDEX  361 

Steam  piping,  depreciation  of 184 

Steam  turbines,  depreciation  of 184 

Stock  assessment,  payment  of,  not  deductible 57 

Stock  assessment,  not  income  of  corporation 58 

STOCK,  CAPITAL: 

Called  for  by,  return 212 

Sales  of,  not  income 94 

Sales  of  rights  to  subscribe  to 30 

STOCK: 

Depreciation  of 187 

Dividends  on 21 

Exchange  of 27 

Interest  on  preferred 104 

Purchases  and  sales  of  same  issue 26 

Record  owner  of,  not  actual  owner 46 

Salary  paid  by 32 

Stock  received  in  reorganization 29 

STOCK  ON  HAND: 

Account  of 201 

Depreciation  of 188 

Value  of 167 

Stock  rights,  sales  of 30 

Stockholders'  responsibility  for  undivided  surplus 20 

Stockholder,  return  of  capital  to 24,  31 

Stocks  and  bonds,  fluctuation  in  value  of 56 

Subdivision,  political,  defined 40 

SUBSIDIARY  COMPANIES: 

Income  of 81 

Where  to  file  returns  of 81 

Suggestions,  bookkeeping 196 

SUMMONS: 

Collector  has  authority  to  summons  taxpayer  or  other  person  in 

connection  with  his  examinations L.  242 

Sunday  or  legal  holiday,  last  day  falling  on 76 

Sundry  expense  accounts 209 

Supertax  (see  "Additional  tax"). 
SURPLUS: 

Account  of 215 

Beyond  reasonable  needs  of  corporation 20,  74 

Dividends  charged  to 215 

Undistributed  surplus  tax 73 

Undivided 20,  73,  L.  221 

Surtax  (see  "Additional  tax"). 

Suspense  items  not  deductible 103 

Switchboards,  depreciation  of 184 

"System  of  accounts  for  retail  merchants" 189 

Table  of  Income  and  War  Income  Taxes  on  various  amounts 10 

Tax  paid  under  protest 59 

TAX-BILLS: 

Corporations 76 

Individuals 17 

Tax-free  covenant  bonds,  interest  subject  to  withholding 62,  L.  229 


362  INDEX 

TAX  ON  CORPORATION: 

Assessment,  notice  of 76 

Calendar  year 76,  L.  230 

Delayed  payment  of  tax,  penalty,  etc 76 

Fiscal  year 77,  L.  230 

Local  benefits no 

Rates 72,  L.  230 

Receipt  for  taxes  paid 17 

Undistributed  surplus  tax 73 

When  due 76 

TAX  ON  INDIVIDUALS: 

Assessment  of  tax 17 

Additional  tax 2,  4,  5 

Calendar  year (note)  n 

Claims  for  abatement  and  refund 17 

Delayed  payment  of,  penalty 17,-  L.  228 

Examples  of  computing 6,  7,  8,  9 

Income  Tax,  not  deductible 53 

Normal  tax 2,  3 

Rates  of . . 2,  3,  4,  5 

Tax  exempt  income L.  221,  L.  233 

Who  is  subject  to  income  tax i 

Who  is  subject  to  war  income  tax 3 

Who  is  subject  to  excess  profits  tax 117 

When  due 17,  L.  228 

When  50  per  cent  penalty  is  added 16 

TAXES: 

Accounts  of 212 

Deductible S3 

Examples  of  computing 6,  7,  8,  9 

Inheritance  tax 58 

Local  benefits 53 

On  bank  stock 58 

Taxes  paid  by  tenant 58 

See"  Normal  Taxes." 

See  "Additional  Taxes." 

See  "Undistributed  Surplus  Tax." 

See  "Excess  Profits  Tax." 

See  "Corporation  Capital  Stock  Tax." 

Withheld  tax,  creditable 52,  L.  224 

TENANT: 

Buildings  erected  by 180 

Improvements  made  by 180 

Taxes  paid  by 58 

Tentative  returns 80 

Theatrical  costumes,  depreciation  of 188 

Three  year  limitation,  collector  may  make  return  within 17 

Timber  lands,  depletion  of 182 

Tobacco,  War  Tax  on L.  264 

Tools,  depreciation  of 184 

Toys,  War  Tax  on L.  269 

TRADE: 

"In  trade,"  defined 55 


INDEX  363 

TRADE — Continued 

Income,  in  trade 54 

Losses,  in  trade 54 

Trade-marks,  depreciation  of 188 

Transportation  charges 200 

Transportation,  War  Tax  on L.  265 

Traveling  abroad,  extension  of  time 16 

Treasury  Regulations,  Corporation  Capital  Stock  Law  Tax L.  286 

Treasury  Stock 212 

Trucks,  auto,  depreciation  of 186 

TRUSTEES: 

Compensation  of 33 

Returns  by 12,  L.  227 

Trust  estate  undistributed  for  period  of  years 38 

Trusts  (see  "Fiduciaries"). 

Turbines,  depreciation  of 184 

UNDISTRIBUTED  INCOME: 

Of  corporations 73,  74 

Of  estates 37,  38 

Of  partnerships 69 

Subject  to  additional  tax 20,  L.  221 

Undistributed  surplus  tax 73,  L.  231 

United  States,  denned L.  240 

Value,  fair  market 35 

VERIFICATION  OF  RETURNS  OF: 

Corporations 76 

Individuals 15 

Military  and  Naval  Service 15 

Vested  interest,  agent  required  to  report  distributed  and  undistributed 

income 37 

Voluntary  assessment  of  stockholders 57,  92 

Wages  (see  "Salaries"). 

War  Estate  Tax L.  278 

War  Excess  Profits  Tax  (see  "Excess  Profits  Tax"). 

War  Income  Taxes,  when  effective i 

War  Revenue  Law L.  249 

Ward,  cestui  que  trust,  exemption  of 51 

Water  company,  service  connections  of  not  exempt in 

Water  rates  on  rented  property 53 

Who  is  subject  to  Income  Tax i 

Who  is  subject  to  War  Income  Tax 3 

Who  is  subject  to  War  Excess  Profits  Tax 117 

Wife  assumes  nationality  of  husband 66 

WITHHOLDING  TAX: 

Amended  law  in  re 60 

Dividends  to  nonresident  aliens  not  subject  to L.  229 

Income  subject  to 60 

Indemnity  of  withholding  party 63 

Information  at  source,  substituted  for 63 

Nonresident  aliens  subject  to 60,  L.  228 


364  INDEX 

WITHHOLDING  TAX— -^Continued 

Nonresident  foreign  corporations  subject  to 60,  L.  238 

Normal  tax  only  subject  to  withholding L.  230 

Release  of  taxes  withheld 63,  L.  247 

Returns  of  taxes  withheld 63 

Stock  dividend  to  nonresident  foreign  corporation 66 

Tax  exempt  clause  in  bonds 62,  L.  229 

Tax  withheld  creditable 52,  L.  224 

Wires  and  cables,  depreciation  of 184 

Worthless  accounts  receivable 213 

Worthless  stocks  and  bonds 187 

Yachts  and  pleasure  boats,  War  Tax  on L.  270 


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The  Value  of  Money 


BY  B.  M.  ANDERSON,  JR.,  PH.D. 

Assistant  Professor  of  Economics,  Harvard  University 
Author  of  "  Social  Value  " 


Cloth,  izmoj  xxviii  +  610  pp.,  Index,  $2.25 


Convinced  of  the  fact  that  the  value  of  money  cannot  be  studied  suc- 
cessfully as  an  isolated  problem,  the  author  of  this  text  considers  virtually 
the  whole  range  of  economic  theory  in  connection  with  the  conclusions 
he  reaches  concerning  the  central  problem  of  this  book.  The  following 
topics  are  discussed:  the  general  theory  of  value;  the  role  of  money  in 
economic  theory  and  the  functions  of  money  in  economic  life;  the  value 
of  money  in  relation  to  the  law  of  supply  and  demand,  in  relation  to  the 
doctrine  of  cost  of  production,  and  in  relation  to  the  capitalization  theory; 
the  theory  of  the  values  of  stocks  and  bonds,  of  "  good  will,"  established 
trade  connections,  trade-marks,  and  other  "  intangibles  "  ;  the  theory  of 
credit,  including  the  relations  of  credit  to  value  and  of  credit  to  money; 
the  causes  governing  the  volume  of  trade,  and  particularly  the  place  of 
speculation  in  the  volume  of  trade;  the  relation  of  "static"  economic 
theory  to  "  dynamic  "  economic  theory. 

In  addition  to  the  theoretical  matter,  which  is  keen,  original  and  most 
ably  presented,  there  is  a  large  amount  of  new,  unpublished,  practical 
material  regarding  the  workings  of  the  stock  market,  the  money  market, 
the  general  range  of  speculation  and  the  measurement  of  the  volume  of 
trade,  etc. 

The  book  will  be  of  interest  to  college  and  university  students,  espe- 
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The  Distribution  of  Wealth 

BY  JOHN  R.  COMMONS 

258  pp.  J2°,  $1.25 

FROM  THE  PREFACE 

In  the  present  essay  an  adequate  acknowledgment  of  indebt- 
edness to  others  would  require  a  history  and  criticism  of  theories 
of  distribution,  pointing  out  what  seems  to  me  to  be  of  perma- 
nent value  in  the  work  of  the  leading  economists,  and  showing 
reasons  for  disagreeing  with  their  weaker  and  more  transient 
arguments.  This  is  a  task  which  needs  to  be  done,  but  for  the 
present  I  am  interested  in  the  practical  outcome  of  these  theories. 

Neither  should  the  reader  expect  to  find  in  this  essay  more 
than  an  outline.  I  have  attempted  to  cut  a  straight  line  through 
a  tangled  jungle,  and  to  give  merely  a  glimpse  into  the  maze  of 
conflicting  opinions.  Each  chapter  herein  might  well  be  ex- 
panded into  a  volume;  and  this  would  necessarily  be  done  were 
it  not  that  I  assume  on  the  part  of  my  readers  a  fair  acquaintance 
with  the  problems  and  the  extant  discussions  of  the  subject. 

TABLE  or  CONTENTS 

I.  Value,  Price  and  Cost.  II.  The  Factors  in  Distribution. 
III.  Diminishing  Returns  and  Rent.  IV.  Diminishing  Returns 
and  Distribution.  V.  Statistical  Data.  VI.  Conclusion. 


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The  American  World  Policies 

BY  WALTER  E.  WEYL 

Author  of  "The  New  Democracy" 

Cloth,  12°,  $2.2* 

The  United  States  is  deeply  concerned  with  the  peace  which 
is  to  be  made  in  Europe,  and  with  the  Great  Society  to  be  re- 
constituted after  the  war.  With  world  influence  come  new  re- 
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ism  and  the  slow  growth  of  a  national  sense.  It  is  a  study  o: 
"  Americanism  "  from  without  and  within. 

An  Inquiry  Into  the  Nature  of  Peace 
and  the  Terms  of  Its  Perpetuation 

BY  THORSTEIN  VEBLEN 

Author  of  "The  Theory  of  the  Leisure  Class,"  "Imperial 

Germany  and  the  Industrial  Revolution,"  "The 

Instinct  of  Workmanship,"  etc. 

Cloth,  I2WO,  $2.OC 

Professor  Veblen's  new  book,  "The  Nature  of  Peace,"  is  i 
close  analysis  of  war  and  the  basis  of  peace.  It  is  of  specia 
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Readers  of  Professor  Veblen's  other  books  will  welcome  thii 
new  volume  which  is  written  in  his  usual  suggestive  and  con 
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Poverty  and  Social  Progress 


BY  MAURICE  PARMELEE,  PH.D. 

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"Suitable  for  college  classes  as  well  as  for  the  general  reader, 
and  contains  a  great  mass  of  material  of  value  to  the  citizen  who 
really  wants  to  know." — Independent. 

"  A  very  competent  presentation  of  the  various  social  factors  that 
go  to  make  up  the  problem  of  poverty." —  Churchman. 

"  A  most  useful  and  educative  book.  It  would  be  well  if  every 
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hands  of  the  worker,  the  producer,  the  business  man  and  woman, 
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society." — American  Review  of  Reviews. 

"  Promoters  of  the  democratic  and  humanitarian  movement  of 
our  time  will  find  this  volume  replete  with  valuable  data  and  stimu- 
lating to  close  and  careful  thinking.  Dr.  Parmelee  defines  social 
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for  all  mankind.  He  shows  this  obstructed  by  poverty  in  so  many 
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requisite.  The  chief  obstructions  being  in  the  production  and  dis- 
tribution of  wealth,  his  discussion  centers  mainly  in  the  problems 
of  these."—  Outlook. 


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